Tax Expenditures 1999 Government of Canada

Tax Expenditures 1999 Government of Canada
Government of Canada
Tax
Expenditures
1999
Government of Canada
Tax
Expenditures
1999
Department of Finance
Canada
Ministère des Finances
Canada
© Her Majesty the Queen in Right of Canada (1999)
All rights reserved
All requests for permission to reproduce this work or any part thereof
shall be addressed to Public Works
and Government Services Canada.
Price: $16.00
Available from the Finance Canada Distribution Centre
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Tel: (613) 943-8665
Fax: (613) 996-0901
Cette publication est également disponible en français.
Cat No.: F1-27/1999E
ISBN 0-660-17757-9
Table of Contents
CHAPTER 1
INTERPRETING TAX EXPENDITURES: A GUIDE ........................................................................................... 5
What is a Tax Expenditure? ................................................................................................................... 5
Tax Expenditures Versus Tax Concessions............................................................................................ 5
The Canadian Approach ........................................................................................................................ 5
International Comparisons .................................................................................................................... 6
Caveats .................................................................................................................................................. 6
What’s New in the 1999 Report? ........................................................................................................... 6
What is in the Report?............................................................................................................................ 8
CHAPTER 2
ESTIMATES AND PROJECTIONS .................................................................................................................... 9
CHAPTER 3
FRAMEWORK AND METHODOLOGY ........................................................................................................... 33
Introduction ......................................................................................................................................... 33
Elements of Tax Expenditures in the Personal and Corporate Income Tax Systems........................... 35
Tax Expenditures in the Goods and Services Tax ................................................................................ 39
Calculation and Interpretation of the Estimates .................................................................................. 42
Developing Historical Estimates ......................................................................................................... 47
Developing Future Projections............................................................................................................ 48
Comparison With Direct Expenditures ................................................................................................ 49
CHAPTER 4
DESCRIPTION OF PERSONAL INCOME TAX PROVISIONS............................................................................. 51
Culture and Recreation........................................................................................................................ 51
Education............................................................................................................................................. 53
Employment ......................................................................................................................................... 54
Family .................................................................................................................................................. 56
Farming and Fishing ........................................................................................................................... 58
Federal-Provincial Financing Arrangements...................................................................................... 61
General Business and Investment ........................................................................................................ 61
Health .................................................................................................................................................. 63
Income Maintenance and Retirement .................................................................................................. 64
Small Business ..................................................................................................................................... 69
Other Items .......................................................................................................................................... 70
Memorandum Items ............................................................................................................................. 72
CHAPTER 5
DESCRIPTION OF CORPORATE INCOME TAX PROVISIONS .......................................................................... 79
Tax Rate Reductions ............................................................................................................................ 79
Tax Credits........................................................................................................................................... 81
Exemptions and Deductions................................................................................................................. 85
Deferrals .............................................................................................................................................. 88
International ........................................................................................................................................ 98
Other Tax Expenditures ..................................................................................................................... 100
Memorandum Items ........................................................................................................................... 103
CHAPTER 6
DESCRIPTION OF THE GOODS AND SERVICES TAX PROVISIONS .............................................................. 111
Zero-Rated Goods and Services......................................................................................................... 111
Tax-Exempt Goods and Services........................................................................................................ 114
Tax Rebates........................................................................................................................................ 118
Tax Credits......................................................................................................................................... 120
Memorandum Items ........................................................................................................................... 121
Chapter 1
INTERPRETING TAX EXPENDITURES: A GUIDE
What is a Tax Expenditure?
Governments have a variety of economic and social objectives. One instrument to achieve these
objectives is public spending. It has often been argued that governments have the flexibility to
use tax concessions, as a substitute for direct public spending, to achieve the same objectives.
Such tax concessions are generally referred to as tax expenditures.
Tax Expenditures Versus Tax Concessions
While all tax expenditures are tax concessions, it does not follow that all tax concessions are
tax expenditures.
To estimate tax expenditures, one needs to determine whether a tax concession is a substitute for
spending. There are a number of considerations in this regard that need to be taken into account.
n
Although a tax concession is generally considered to be a deviation from a benchmark tax
structure, no consensus exists as to what constitutes a benchmark tax structure. Hence, there
is no general agreement on whether or not a specific item is a tax concession. For example, is
the lowest 17-per-cent personal income tax rate in Canada a tax concession or is it part of the
underlying tax structure? For the purpose of this report, this rate is considered a part of the
underlying structure of the tax system.
n
Difficulties also arise when trying to determine whether a tax concession is a substitute
for direct spending. For example, the dividend tax credit simply offsets the tax paid at
the corporate level to avoid double taxation, and hence should not be classified as a
tax expenditure.
Naturally, given these difficulties, there is a large element of subjectivity in defining tax
expenditures. As a result, international comparisons of tax expenditures are not very useful.
The Canadian Approach
The Canadian approach seeks to provide as much information as possible to the reader, without
getting into a controversy as to whether or not an item is a tax expenditure. Consequently, any
deviation from a narrowly defined tax structure is reported. This allows the reader to decide
whether or not a particular tax concession qualifies as a tax expenditure. This information on
deviations from the tax system is reported in two parts. The first includes a list of all items that
could be considered to be tax expenditures under a very broad (and perhaps unrealistic)
definition. The second consists of all other deviations from the tax system; these are reported as
memorandum items.
5
CHAPTER 1
International Comparisons
Relative to other countries, Canada has taken a broad approach to reporting tax expenditures.
In the United Kingdom, tax concessions are reported under three categories. The first category,
structural relief, incorporates both tax concessions that are a fundamental part of the tax structure
and those which simplify administration and compliance. In contrast, the second category, tax
expenditures, consists of tax concessions which are considered alternatives to direct spending.
The third category comprises those tax reliefs which contain elements of both structural reliefs
and tax expenditures, and thus cannot be classified explicitly as either structural reliefs or tax
expenditures. Thus, all tax concessions are reported, but direction is given to the reader as to the
appropriate classification of each.
In the United States, the method of reporting tax expenditures is slightly different. The United
States reports tax expenditures against two different tax structures: normal and reference law. The
normal tax structure reflects a comprehensive income tax system. Under the normal tax structure,
any deviation from the basic tax structure is reported as a tax expenditure. The reference law
baseline, however, more closely reflects existing tax law. Under reference law, tax expenditures
are limited to those deviations from the tax structure that serve program functions.
Caveats
Care must be taken in interpreting the estimates and projections of tax expenditures in the tables
for the following reasons.
n
Tax expenditures are values of tax revenues forgone to achieve a variety of economic and
social objectives. Whether or not the magnitudes of tax expenditures are appropriate depends
upon an evaluation of the social and economic policies that generated them. The values
reported in the tables provide no information towards such an evaluation.
n
Estimates of various tax expenditure items cannot be added together – this is because the
cost of each tax expenditure is estimated separately, assuming that all other tax provisions
remain unchanged.
n
The estimates assume all other factors remain unchanged (i.e. there is no allowance for
behavioural changes, consequential government policy changes or changes in aggregate
economic activity in response to the change in the tax expenditure).
n
In addition to these considerations, the projections are subject to forecast error and are “best
efforts” which have no greater degree of reliability than the variables that explain them.
What’s New in the 1999 Report?
Estimates and projections for the changes to both the tax expenditures and memorandum items
proposed in the 1999 budget have been added, which are:
Personal income tax measures
n Extension to all taxpayers of the tax relief provided by the $500 supplement in the 1998
budget to the amounts used to determine basic personal tax credits.
6
INTERPRETING TAX EXPENDITURES: A GUIDE
n
Increase by a further $175 the amount of income that can be received tax-free for
all taxpayers.
−
With these increases, the basic personal amount will rise to $7,131 and the spousal and
equivalent-to-spouse amount will rise to $6,055.
n
Increases to the National Child Benefit (NCB) supplement under the Canada Child Tax
Benefit (CCTB) based on the $850 million committed in the 1998 budget as the second
federal contribution to the NCB. The maximum supplement amounts will be increased by
$180 in July 1999 and a further $170 in July 2000. Moreover, to avoid increasing marginal
tax rates, the phase-out range of the NCB supplement will be expanded from $25,921 to
$27,750 in July 1999 and from $27,750 to $29,590 in July 2000.
n
Provision of an additional $300 million in July 2000 to enhance the CCTB for modest- and
middle-income families. This will be done through an increase in the income threshold at
which CCTB base benefits start to be reduced from $25,921 to $29,590.
−
As a result of these changes, the maximum CCTB benefits will reach $1,975 for the first
child and $1,775 for each additional child in the year 2000, representing a maximum
benefit for a two-child family of $3,750, an increase of $700 since 1998 and $1,210
since 1996.
n
Introduction of a relieving mechanism for the computation of tax on certain retroactive
lump-sum payments.
n
Expansion of the medical expense tax credit to include certain costs of group homes for
disabled persons, certain therapies for disabled persons and tutoring and talking books for
persons with learning disabilities.
n
Allowance for registered retirement savings plan (RRSP) proceeds to be transferred taxfree on death to a financially dependent child or grandchild even where the annuitant has
a spouse.
Business income tax measures
n Extension of the temporary capital tax surcharge on large deposit-taking institutions to
October 31, 2000.
n
Extension of the manufacturing and processing tax rate reduction to the electricitygenerating sector.
Sales tax measures
n Elimination of the phase-in of a $105 supplement to the goods and services tax (GST) credit
for single parents. Also, proposed administrative changes to improve the responsiveness of
the credit to changes such as marriage breakdown or the birth of a child.
As usual, other minor changes have been made to provide information that was not previously
available and to update or otherwise improve the descriptions of certain measures.
7
CHAPTER 1
What is in the Report?
n
Chapter 2 presents estimates of tax expenditures and memorandum items.
n
Chapter 3 provides the methodology used to derive these estimates.
n
Chapters 4 (personal income tax), 5 (corporate income tax) and 6 (GST) provide simplified
descriptions of each tax expenditure and memorandum item, as well as information on the
data sources and methodology used in constructing the estimates.
8
Chapter 2
ESTIMATES AND PROJECTIONS
Tables 1 to 3 provide tax expenditure values for personal income tax, corporate income tax and the goods
and services tax (GST) for the years 1994 to 2001. In the case of personal income tax, tax expenditures
are grouped according to functional categories. This grouping into functional categories is not intended as
a policy justification for the specific provisions nor is it the case that all tax measures fall neatly into one
of the categories. The categories are provided solely for organizational purposes.
All estimates are reported in millions of dollars. The letter “S” indicates that the cost is less than
$2.5 million while “n.a.” signifies that data were not available. The inclusion in the report of items for
which estimates are not available is warranted given that the report is designed to provide information on
the type of assistance delivered through the tax system even if it is not always possible to provide a
quantitative estimate. Work is continuing to obtain quantitative estimates where possible.
9
Table 1
Personal income tax expenditures *
Estimates
1994
1995
Projections
1996
1997
1998
1999
2000
2001
($ millions)
Culture and recreation
Deduction for clergy residence
60
56
59
57
57
57
57
57
Flow-through of capital cost allowance (CCA)
on Canadian films1
12
48
–
–
–
–
–
–
Deduction for certain contributions by individuals
who have taken vows of perpetual poverty
S
S
S
S
S
S
S
S
Write-off of Canadian art purchased by
unincorporated businesses
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Assistance for artists
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Deduction for artists and musicians
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Non-taxation of capital gains on gifts of
cultural property
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
185
195
210
265
295
315
340
365
Education
Tuition fee credit2
Education
credit3
Education and tuition fee credits transferred4
Carry-forward of education and tuition fee
Student loan interest credit6
credits5
43
44
55
92
190
195
195
195
205
215
260
315
320
340
360
390
–
–
–
–
10
25
40
50
–
–
–
–
120
135
150
160
* The elimination of a tax expenditure would not necessarily yield the full tax revenues shown in the table. See pages 42-47
for a discussion of the reasons for this.
Personal income tax expenditures (cont’d.)
Estimates
1994
1995
Projections
1996
1997
1998
1999
2000
2001
($ millions)
Registered education savings plans (RESPs)7
n.a.
n.a.
35
32
44
78
125
185
Exemption on first $500 of scholarship, fellowship
and bursary income
6
6
6
6
6
6
6
6
Deduction of teachers’ exchange fund contributions
S
S
S
S
S
S
S
S
Deduction of home relocation loans
S
S
S
S
S
S
S
S
Non-taxation of allowances to volunteer firefighters8
4
4
4
4
–
–
–
–
Employment
Deduction for emergency service
volunteers8
Northern residents deductions9
–
–
–
–
14
14
14
14
155
125
125
115
120
120
125
125
Overseas employment credit
30
31
44
36
37
37
37
37
Employee stock options10
56
74
125
195
130
135
140
145
Non-taxation of strike pay
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Deferral of salary through leave of absence/
sabbatical plans
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Employee benefit plans
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Non-taxation of certain non-monetary
employment benefits
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
1,190
1,200
1,205
1,185
1,195
1,315
1,435
1,450
470
470
470
475
480
510
540
550
10
6
7
7
7
7
7
7
Family
Spousal credit11
Equivalent-to-spouse credit11
Infirm dependant
credit12
Personal income tax expenditures (cont’d.)
Estimates
1994
1995
Projections
1996
1997
1998
1999
2000
2001
($ millions)
Caregiver credit6
–
–
–
–
120
125
125
125
5,275
5,240
5,215
5,315
5,550
6,010
6,525
6,820
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
470
275
325
320
310
310
310
310
43
31
115
98
86
100
100
100
8
14
19
23
35
42
52
60
-15
-15
-35
-39
-69
-48
-48
-48
S
S
S
S
S
S
S
S
Deferral of income from grain sold through
cash purchase tickets16
31
19
6
-1
8
8
8
8
Deferral through 10-year capital gain reserve16
14
8
-2
6
6
6
6
6
n.a.
n.a
n.a
n.a
n.a
n.a
n.a
n.a
Canada Child Tax Benefit13
Deferral of capital gain through transfer to spouse
Farming and fishing
$500,000 lifetime capital gains exemption for
farm property14
Net Income Stabilization Account
Deferral of tax on government contributions15
Deferral of tax on bonus and interest income
Taxable withdrawals
Deferral of income from destruction of livestock
Deferral of capital gain through intergenerational
rollovers of family farms
Exemption from making quarterly tax instalments
n.a.
n.a
n.a
n.a
n.a
n.a
n.a
n.a
Cash basis accounting
n.a.
n.a
n.a
n.a
n.a
n.a
n.a
n.a
Flexibility in inventory accounting
n.a.
n.a
n.a
n.a
n.a
n.a
n.a
n.a
Federal-provincial financing arrangements
Quebec abatement
2,185
2,320
2,410
2,560
2,640
2,740
2,810
2,935
Transfers of income tax room to provinces
9,090
9,745
10,240
11,215
11,600
12,030
12,350
12,885
Personal income tax expenditures (cont’d.)
Estimates
1994
1995
Projections
1996
1997
1998
1999
2000
2001
($ millions)
General business and investment
$100,000 lifetime capital gains exemption17
Partial inclusion of capital
gains18
Deduction of limited partnership losses16, 19
Investment tax
credits16
8,815
34
–
–
–
–
–
–
385
405
655
850
635
655
675
695
295
195
205
195
210
210
210
210
70
54
39
22
38
38
38
38
Deferral through five-year capital gain reserve16
-27
-6
12
-7
-7
-7
-7
-7
Deferral through capital gains rollovers
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Deferral through billed-basis accounting
by professionals
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Deduction of accelerated tax
depreciation20
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
$1,000 capital gains exemption on personal-use property
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
$200 capital gains exemption on foreign exchange
transactions
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Taxation of capital gains upon realization
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
1,270
1,440
1,490
1,605
1,665
1,715
1,745
1,765
275
270
265
270
275
275
280
285
260
305
330
350
370
390
410
430
–
–
–
24
40
40
40
40
Non-taxation of guaranteed income supplement
and spouse’s allowance benefits
260
285
300
305
310
315
320
325
Non-taxation of social assistance benefits24
705
635
560
510
490
490
490
490
Health
Non-taxation of business-paid health
and dental benefits21
Disability credit
Medical expense
credit22
Medical expense supplement for earners23
Income maintenance and retirement
Personal income tax expenditures (cont’d.)
Estimates
1994
1995
Projections
1996
1997
1998
1999
2000
2001
($ millions)
Non-taxation of workers’ compensation
benefits16, 25
585
635
620
605
615
615
615
615
Non-taxation of amounts received as damages
in respect of personal injury or death
20
19
18
17
18
18
18
18
Non-taxation of employer-paid premiums
for group term life insurance of up to $25,00026
87
–
–
–
–
–
–
–
6
4
4
S
S
S
S
S
140
135
140
140
140
140
140
140
Non-taxation of veterans’ allowances, civilian war
pensions and allowances, and other service
pensions (including those from Allied countries)27
Non-taxation of veterans’ disability pensions
and support for dependants
Treatment of alimony and maintenance
payments28
Age credit
Pension income credit
Saskatchewan Pension Plan
260
250
250
250
250
250
250
250
1,290
1,270
1,320
1,345
1,490
1,515
1,540
1,570
325
350
365
385
390
400
405
415
S
S
S
S
S
S
S
S
4,785
5,290
5,940
6,345
6,975
7,675
8,070
8,880
Registered retirement savings plans
Deduction for contributions
Non-taxation of investment
Taxation of withdrawals
Net expenditure30
income29
3,565
3,850
3,520
3,400
3,310
3,890
4,370
4,880
-1,620
-1,750
-2,192
-2,510
-2,750
-3,020
-2,945
-3,230
6,730
7,390
7,270
7,235
7,535
8,545
9,495
10,530
Personal income tax expenditures (cont’d.)
Estimates
1994
1995
Projections
1996
1997
1998
1999
2000
2001
($ millions)
Registered pension plans
Deduction for contributions
Non-taxation of investment income29
4,890
4,925
4,930
4,980
5,030
5,080
5,150
5,200
9,540
10,040
9,020
8,095
7,335
7,985
8,675
8,880
Taxation of withdrawals
-4,010
-4,520
-4,905
-5,490
-6,150
-6,890
-7,800
-8,735
Net expenditure30
10,420
10,445
9,045
7,585
6,215
6,175
6,025
5,345
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Deferred profit-sharing plans
Non-taxation of RCMP pensions/compensation
in respect of injury, disability or death31
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Non-taxation of up to $10,000 of death benefits
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Non-taxation of investment income
on life insurance policies32
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
1,725
590
475
875
645
645
645
645
77
79
74
64
72
72
72
72
110
235
91
80
130
130
130
130
4
-2
-5
-1
-1
-1
-1
-1
Small business
$500,000 lifetime capital gains exemption
for small business shares16, 33
Deduction of allowable business
investment losses16
Labour-sponsored venture capital
corporations (LSVCCs) credit34, 35
Deferral through 10-year capital gain reserve16
Other items
Non-taxation of capital gains on
principal residences36
Partial inclusion rate
1,795
1,085
1,245
1,270
920
905
905
905
Full inclusion rate
2,390
1,445
1,660
1,690
1,225
1,205
1,205
1,205
Personal income tax expenditures (cont’d.)
Estimates
1994
1995
Projections
1996
1997
1998
1999
2000
2001
($ millions)
Non-taxation of income from the Office
of the Governor General
S
S
S
S
S
S
S
S
Assistance for prospectors and grubstakers
S
S
S
S
S
S
S
S
900
940
1,090
1,265
1,305
1,350
1,385
1,425
Charitable donations
credit37
Reduced inclusion rate for capital gains arising
from certain charitable donations38
–
–
–
90
95
100
105
110
21
34
28
15
25
25
25
25
9
10
11
16
12
12
12
12
–
10
10
10
10
10
10
10
Non-taxation of income of Indians on reserves
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Non-taxation of gifts and bequests
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
960
1,155
1,380
1,440
1,475
1,510
1,560
1,610
Non-taxation of specified incidental expenses
6
6
5
5
5
5
5
5
Non-taxation of allowances for diplomats and
other government employees posted abroad
8
9
8
8
8
8
8
8
305
365
420
480
560
565
570
575
S
S
S
S
S
S
S
S
Gifts to the Crown credit39
Political contribution
credit16
Retroactive lump-sum payments40
Memorandum items
Non-taxation of lottery and gambling winnings41
Child care expense
deduction42
Attendant care expense deduction
deduction16, 43
64
61
64
62
73
73
73
73
Deduction of carrying charges incurred
to earn income16, 44
540
645
590
540
600
600
600
600
Deduction of meals and entertainment expenses45
110
97
130
85
110
110
110
110
48
52
52
51
51
51
51
51
Moving expense
Deduction of farm losses for part-time farmers
Personal income tax expenditures (cont’d.)
Estimates
1994
1995
Projections
1996
1997
1998
1999
2000
2001
($ millions)
Farm and fishing loss carry-overs16
9
10
10
13
11
11
11
11
Capital loss carry-overs16
87
89
160
115
115
115
115
115
Non-capital loss carry-overs16
74
86
100
89
89
89
89
89
S
S
S
S
S
S
S
S
Logging tax credit
expenditures46
77
78
170
160
135
135
135
135
Deduction of other employment expenses
540
540
585
615
635
655
675
695
Deduction of union and professional dues
465
505
510
520
525
530
535
540
Deduction of resource-related
Employment insurance
Employment insurance contribution credit
1,300
1,320
1,260
1,325
1,250
1,255
1,280
1,255
Non-taxation of employer-paid premiums
2,655
2,710
2,605
2,735
2,585
2,600
2,650
2,590
Canada and Quebec Pension Plan credit
1,055
1,135
1,195
1,315
1,590
1,775
2,020
2,290
Non-taxation of employer-paid premiums
Canada and Quebec Pension Plans
1,360
1,465
1,545
1,685
1,730
2,090
2,335
2,660
Foreign tax credit47
220
280
300
320
345
365
390
410
Dividend gross-up and credit
645
730
815
880
945
1,010
1,075
1,140
–
–
–
–
140
150
–
–
17,325
17,650
17,885
18,120
19,015
21,320
23,580
24,220
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Supplementary low-income credit48
Basic personal
credit49
Non-taxation of capital dividends
Notes
1
The increase in this tax expenditure in 1995 reflects increases in the average amount of CCA claimed and the number of individuals claiming CCA in that
year. The flow-through of CCA on Canadian films is not available for taxation years later than 1995, and is replaced by a tax credit to producers.
2
The 1997 budget extended this credit to most mandatory ancillary fees imposed by post-secondary institutions, beginning in 1997.
3
The 1996 budget increased this credit from $80 to $100 per month, beginning in 1996. The 1997 budget increased this credit to $150 per month for 1997,
and $200 per month thereafter. The 1998 budget proposed to allow part-time students to claim a part-time education amount of $60 per month.
4
The 1996 budget increased from $4,000 to $5,000 the limit on the transfer of these amounts, beginning in 1996. The increase in this tax expenditure in
1997 reflects a 50-per-cent increase in the average claim in that year, based on preliminary information.
5
The 1997 budget introduced this measure, effective for 1997 and subsequent years.
6
This measure was proposed in the 1998 budget.
7
The 1998 budget proposed to supplement annual contributions to RESPs with a 20-per-cent grant, the Canada Education Savings Grant, beginning in
1998. While this enhancement does not represent a tax expenditure, it increases the cost of the tax expenditure to the extent that it encourages participation
in the RESP program. No information is available for years prior to 1996.
8
The 1998 budget proposed to replace the $500 tax-free allowance for volunteer firefighters with a deduction of up to $1,000 for emergency service
volunteers. The tax expenditure estimate for the emergency service volunteer deduction includes claims by firefighters after 1997.
9
The higher level of the tax expenditure in 1994 reflects the fact that residents of communities who are no longer eligible for benefits following the reform
of northern benefits were eligible for one-third benefits in 1994, and none thereafter.
10
The increase in this tax expenditure in 1996 reflects a 30-per-cent increase in the number of claimants and a 30-per-cent increase in the average claim in
that year. The increase in this tax expenditure in 1997 reflects a 50-per-cent increase in the number of claimants, based on preliminary information.
11
The 1999 budget proposed to increase this tax credit by $675 for all taxpayers, beginning July 1, 1999.
12
The decline in this tax expenditure for 1995 reflects a 35-per-cent decrease in the number of claimants in that year. The 1996 budget increased the
maximum credit per dependant from $270 to $400.
13
The 1996 and 1997 budgets increased this tax benefit. The 1998 and 1999 budgets proposed additional enrichments to this provision. Payments made
between January and December of the year are reported.
14
The decline in this tax expenditure in 1995 reflects a 20-per-cent decrease in the number of claimants and a 25-per-cent decrease in the average claim in
that year. The increase in this tax expenditure in 1996 reflects a 15-per-cent increase in the number of claimants in that year.
15
The high level of this tax expenditure in 1996 reflects special start-up payments to farmers in Saskatchewan in that year.
16
This tax expenditure is highly volatile. It is projected at its historical average.
17
The lifetime capital gains exemption for general property is not available for taxation years later than 1994. The tax expenditure for 1995 reflects late and
adjusted elections filed in that year with respect to gains accrued up to February 22, 1994. The large value of this tax expenditure in 1994 reflects the
special election to claim the exemption for eligible capital gains accrued up to February 22, 1994 on 1994 tax returns.
18
The increase in the value of this tax expenditure in 1996 reflects a 50-per-cent increase in the number of claimants partially offset by a 10-per-cent
decrease in the average claim in that year. The increase in the value for 1997 reflects a 30-per-cent increase in the number of claimants in that year, based
on preliminary information. However, projections are based on historical trends.
19
The decline in the value of this tax expenditure in 1995 reflects a 40-per-cent decline in the number of claimants in that year.
20
This tax expenditure includes the deduction of scientific research and experimental development expenditures. Data are not available to estimate this tax
expenditure with precision.
21
The 1998 budget proposed to allow unincorporated owner-operators to deduct premiums for supplementary health care coverage against their business
income to a maximum amount, beginning in 1998.
22
The 1997 budget broadened this credit to cover additional expenses, beginning in 1997. The 1999 budget proposed to further broaden this credit for the
care and education of persons with disabilities, beginning in 1999.
23
This measure was introduced in the 1997 budget. The value of this tax expenditure in 1997 reflects preliminary information.
24
The decline in this tax expenditure in 1997 reflects preliminary information, suggesting lower levels in future years.
25
The increase in this tax expenditure in 1995 reflects a 10-per-cent increase in the number of claimants in that year.
26
These amounts became taxable after July 1, 1994.
27
The expected decrease in this tax expenditure is in line with the historical trend.
28
The 1996 budget eliminated the income inclusion for recipients of child support payments and disallowed the deduction to payers for agreements made
after April 30, 1997.
29
Projected values for this tax expenditure are lower than those provided in last year’s publication due to lower-than-expected interest rates in those years.
30
Net expenditure represents the total tax expenditure associated with this measure.
31
The amounts reported in previous years for this tax expenditure included taxable amounts and did not cover all non-taxable RCMP pensions. This tax
expenditure cannot be estimated with precision.
32
Although this measure does provide tax relief for individuals, it is implemented through the corporate tax system. See under “Interest credited to life
insurance policies” in the corporate income tax expenditure tables for an estimate of the value of this tax expenditure.
33
The decline in this tax expenditure in 1995 reflects a 50-per-cent decline in the number of claimants and a 15-per-cent decline in the average claim in that
year. The decline in this tax expenditure in 1996 reflects a further 30-per-cent decline in the average claim, partially offset by a 15-per-cent increase in the
number of claims in that year. The increase in this tax expenditure in 1997 reflects a 65-per-cent increase in the number of claims and a 10-per-cent
increase in the average claim in that year, based on preliminary information.
34
The 1996 budget reduced this credit from 20 per cent to 15 per cent and the purchase amount eligible for the credit from $5,000 to $3,500 per year, for
purchases made after March 5, 1996. The purchase amount eligible for the credit was increased to $5,000 in 1998, effective for 1998 and subsequent
years.
35
The high value of this tax expenditure in 1995 reflects record sales of shares of LSVCCs for that year. The decline in the value of this expenditure in 1996
reflects a 30-per-cent decline in the number of claimants and a 45-per-cent decline in the average claim in that year. The value of this tax expenditure in
1998 is based on preliminary information of sales of shares of LSVCCs for that year.
36
The decline in this tax expenditure in 1995 and 1998 reflects declines in home values and home sales in these years. Overall, this tax expenditure is
expected to remain below its 1994 value, reflecting projected home values and sales.
37
The 1994 budget lowered the threshold at which charitable donations begin to earn the 29-per-cent credit from $250 to $200. The 1996 and 1997 budgets
further enriched this credit. The increase in the value of this tax expenditure in 1997 reflects a 20-per-cent increase in the average claim in that year, based
on preliminary information.
38
This measure was introduced in the 1997 budget. The value of this tax expenditure in 1997 reflects preliminary information.
39
The increase in the value of this tax expenditure in 1995 reflects a 10-per-cent increase in the number of claimants and a 45-per-cent increase in the
average claim in that year. The decrease in the value of this tax expenditure in 1997 reflects a 35-per-cent decrease in the number of claimants and a 15per-cent decrease in the average claim in that year, based on preliminary information.
40
This measure was proposed in the 1999 budget, effective for qualifying retroactive lump-sum payments received after 1994.
41
This estimate assumes that the total amount of lottery and horse racing winnings would be included in income and be subject to tax. However, there is
some uncertainty regarding the proper benchmark tax system in this area. For example, if the benchmark system included taxation of winnings, it would
also have to include a deduction for the purchase cost of tickets. A threshold below which winnings would not be taxable may also be necessary, due to the
large administrative cost of taxing very small prizes. In addition, proceeds from the sale of lottery tickets are an important source of funds for provincial
governments and not-for-profit organizations. As a result, there is already an element of taxation to lottery and gambling proceeds. This estimate is
therefore included as a memorandum item only.
42
The 1996 budget broadened eligibility criteria for claiming this deduction, beginning in 1996. The 1998 budget proposed to increase the maximum claim
under this provision and to extend it to part-time students, beginning in 1998.
43
The 1998 budget proposed to enhance the moving expense deduction by including certain costs of maintaining a vacant former residence (including mortgage interest
and property taxes) and other miscellaneous relocation expenses.
44
The increase in this tax expenditure in 1995 reflects a 10-per-cent increase in the average claim in that year. The decline in this tax expenditure in 1996
reflects a 15-per-cent decrease in the number of claimants in that year. The further decline in this tax expenditure in 1997 reflects a 10-per-cent decrease in
the number of claimants in that year, based on preliminary information.
45
The deduction is limited to 50 per cent of eligible amounts incurred after February 1994. Amounts incurred earlier were deductible at 80 per cent.
46
The increase in this tax expenditure in 1996 reflects a 40-per-cent increase in the number of claimants, and a 55-per-cent increase in the average claim in
that year.
47
The expected increase in this tax expenditure is in line with the historical trend.
48
This measure was proposed in the 1998 budget. The 1999 budget proposed to extend this measure to all taxpayers, effective July 1, 1999. This latter
proposal would increase the tax expenditures associated with the basic personal credit and the spousal/equivalent-to-spouse credits and eliminate the
supplementary low-income credit. The 1998 budget also proposed relief from the general surtax for low- and middle-income taxpayers while the 1999
budget extended this relief to all taxpayers. These proposals represent a change in the benchmark tax system, and consequently there is no associated tax
expenditure.
49
The 1999 budget proposed to increase the basic personal credit by $675, effective July 1, 1999.
Table 2
Corporate income tax expenditures*
Projections1
Estimates
19942
1995
1996
1997
1998
1999
2000
2001
($ millions)
Tax rate reductions
Low tax rate for small businesses
Low tax rate for manufacturing and processing 3
Low tax rate for credit unions
Exemption from branch tax for transportation,
communications, banking and
iron ore mining corporations
Exemption from tax for international banking centres
Tax credits
Investment tax credits
Scientific research and experimental development
investment tax credit
Atlantic investment tax credit4
Special investment tax credit5
Small business investment tax credit6
Investment tax credits claimed in current year
but earned in prior years7
Political contribution tax credit
Canadian film or video production tax credit8
Film or video production services tax credit9
2,365
1,005
38
2,470
1,520
42
2,560
1,315
42
2,915
1,535
46
2,810
1,480
47
2,685
1,415
47
2,695
1,420
48
2,765
1,460
50
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
885
105
29
84
900
165
34
–
930
270
–
–
955
200
–
–
980
68
–
–
1,010
50
–
–
1,035
55
–
–
1,065
55
–
–
555
S
–
–
615
S
9
–
420
S
34
–
430
S
35
S
440
S
37
55
450
S
38
57
460
S
40
59
470
S
41
60
* The elimination of a tax expenditure would not necessarily yield the full tax revenues shown in the table. See pages 42-47
for a discussion of the reasons for this.
Table 2
Corporate income tax expenditures (cont’d.)
Estimates
1994
Projections
1995
1996
1997
1998
1999
2000
2001
($ millions)
Exemptions and deductions
Partial inclusion of capital gains
525
625
625
635
660
690
720
755
-385
-310
-325
-325
-310
-350
-375
-375
Royalties and mining taxes
Non-deductibility of Crown royalties and
mining taxes
540
480
475
475
450
495
510
520
Earned depletion10
Resource allowance
21
41
40
30
25
10
10
S
Deductibility of charitable donations
89
97
120
120
130
130
130
130
Deductibility of gifts to the Crown
5
3
5
3
3
3
3
3
Interest on small business financing loans
S
S
S
S
S
S
S
S
Non-deductibility of advertising expenses
in foreign media
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Non-taxation of provincial assistance for
venture investments in small business
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Deferrals
Accelerated write-off of capital assets and
resource-related expenditures11
Table 2
Corporate income tax expenditures (cont’d.)
Estimates
1994
Projections
1995
1996
1997
1998
1999
2000
2001
30
35
35
($ millions)
12
Allowable business investment losses
22
13
Holdback on progress payments to contractors
24
25
25
30
15
39
15
20
20
20
20
20
Available for use
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Capital gains taxation on realization basis
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
18
7
6
10
10
10
10
10
Deductibility of contributions to mine reclamation
and environmental trusts
S
S
S
S
S
S
S
S
Deductibility of countervailing and
anti-dumping duties14
–
–
–
–
n.a.
n.a.
n.a.
n.a.
Deductibility of earthquake reserves15
–
–
–
–
15
16
17
18
Cash basis accounting
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Flexibility in inventory accounting
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Expensing of advertising costs
Deferral of income from grain sold through
cash purchase tickets
Deferral of income from destruction of livestock
Deferral of tax from use of billed-basis
accounting by professionals
13
7
S
7
7
7
7
7
S
S
S
S
S
S
S
S
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
23
57
60
63
66
69
72
76
International
Non-taxation of life insurance companies’
world income
16
Exemptions from non-resident withholding tax
Copyright royalties17
Table 2
Corporate income tax expenditures (cont’d.)
Estimates
1994
Projections
1995
1996
1997
1998
1999
2000
2001
175
185
190
($ millions)
Royalties for the use of, or right to use,
other property18
49
51
150
160
165
Interest on deposits
400
440
435
465
490
470
480
495
Interest on long-term corporate debt
595
660
650
690
735
705
720
740
Dividends19
21
52
62
76
84
78
72
73
Management fees
16
17
18
19
19
20
21
23
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
560
695
720
860
815
775
790
820
70
73
74
77
81
85
90
94
Non-taxation of registered charities and
other non-profit organizations
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Income tax exemption for provincial and
municipal corporations
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Non-taxation of certain federal
Crown corporations
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Exemption from Canadian income tax of
income earned by non-residents from
the operation of a ship or aircraft in
international traffic
Other tax expenditures
Transfer of income tax room to provinces in
respect of shared programs
Interest credited to life insurance policies
Excise tax transportation rebate
20
Aviation fuel excise tax rebate21
S
–
–
–
–
–
–
–
–
–
–
n.a.
n.a.
n.a.
n.a.
–
Table 2
Corporate income tax expenditures (cont’d.)
Estimates
1994
Projections
1995
1996
1997
1998
1999
2000
2001
($ millions)
Surtax on the profits of tobacco
manufacturers22
-45
-59
-65
-65
-70
-70
-15
–
–
-34
-51
-58
-63
-69
-75
–
Refundable Part I tax on investment income
of private corporations24
855
1,045
1,215
1,135
1,150
1,200
1,250
1,290
Refundable capital gains for investment
corporations and mutual fund
corporations
170
150
180
190
195
205
215
225
850
650
900
955
1,195
1,325
1,345
1,310
2,135
2,845
2,345
2,760
2,435
2,520
2,650
2,800
84
68
81
82
100
110
120
120
130
125
160
155
135
140
150
155
8
19
13
13
14
14
15
15
240
190
200
205
210
220
225
235
Threshold31
485
520
540
550
560
570
585
595
Exempt corporations
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
145
215
220
250
235
235
235
235
Temporary tax on the capital of large
deposit-taking institutions23
Memorandum items
25
Loss carry-overs
Non-capital losses carried back26
Non-capital losses applied to current year
Net capital losses carried back28
Net capital losses applied to current year
Farm losses applied to current year29
Deductible meals and entertainment
expenses30
27
Large corporations tax
Patronage dividend deduction
Table 2
Corporate income tax expenditures (cont’d.)
Estimates
1994
Projections
1995
1996
1997
1998
1999
2000
2001
($ millions)
Logging tax credit32
89
75
30
28
30
30
30
30
Deductibility of provincial royalties
(joint venture payments) for the
Syncrude project (remission order) 33
11
35
63
32
24
16
15
15
Deductibility of royalties paid to
Indian bands
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Non-resident-owned investment
corporation refund
60
105
105
120
130
145
160
170
S
S
S
S
S
S
S
S
Deferral of capital gains income through
various rollover provisions
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Deduction for intangible assets
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Tax exemption on income of foreign
affiliates of Canadian corporations
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Investment corporation deduction
Notes
1
Unless otherwise indicated in the footnotes, changes in the projections from the figures in last year’s edition of this document result from changes in the
explanatory economic variables upon which the projections are based.
2
The 1994 figures are based upon final data and may differ from the figures in last year’s edition of this document which were based on preliminary data.
3
The increase from 1994 to 1995 in the revenue cost of the low tax rate for manufacturing and processing (M&P) profits reflects both a decrease in the tax
rate on M&P profits from 22 per cent to 21 per cent and an increase in the level of M&P profits. The decrease from 1995 to 1996 reflects a projected
decrease in the level of M&P profits.
4
The projected cost of the tax expenditure for 1998 and beyond is lower because a large portion of this tax expenditure relates to the Hibernia offshore oil
project, which has completed its investment phase. No new offshore projects have been included in the projections. The tax expenditure could be higher if
a project were to proceed.
5
New investments did not earn this credit after December 31, 1994. Credits not claimed in 1994 and prior years may be carried forward. However, they are
included in the investment tax credits claimed in a current year but earned in prior years.
6
New investments did not earn the small business investment tax credit after December 31, 1993. As a result, this credit could only be earned in the 1994
and previous taxation years. Unclaimed credits are carried forward and may be claimed in subsequent years. When claimed, these unused credits are
included under investment tax credits claimed in a current year but earned in prior years.
7
All investment tax credits earned in previous years but not claimed until the current year are included under this item. Because this tax expenditure
fluctuates significantly from year to year, the tax expenditure projections are based upon an average of the amounts of 1992 to 1995.
8
Taxation year 1995 is a transition year. Some films are financed by tax shelter deductions for accelerated capital cost allowance.
9
This measure was introduced in 1997.
10
Due to the elimination of the earned depletion allowance, there have been no additions to this tax expenditure pool since 1989. Amounts claimed in the
current years relate to depletion earned in 1989 and prior years.
11
This tax expenditure consists of the fast write-off of certain capital assets, including capital equipment used for scientific research and experimental
development, and of resource exploration and development expenditures and energy conservation and efficiency equipment. See text on page 88
for a further explanation of why no figures have been calculated.
12
The tax expenditure for allowable business investment losses fluctuates from year to year depending upon the amount of current year losses and the
availability of income against which to apply these losses.
13
The amount of this tax expenditure can fluctuate significantly from year to year depending primarily upon the level of construction activity.
14
This measure was introduced in 1998.
15
This measure was introduced in 1998.
16
These estimates are based on the benchmark assumption that no behavioural response would occur after the hypothetical removal of existing withholding
tax exemptions. This assumption is particularly difficult to sustain for this type of tax, as indicated in the text, which means that the amounts shown in the
table should not be regarded as estimates of the revenue gain that would be realized from the hypothetical removal of the listed withholding tax
exemptions.
17
The low level in 1994 is due to the low level of exempt payments made to non-residents that year. This can be expected on occasion since the events that
trigger such payments will not necessarily occur on a regular basis.
18
The large increase from 1995 to 1996 can be attributed to protocol changes to the Canada-U.S. tax treaty.
19
The low level in 1994 is due to the low level of exempt payments made to non-residents that year. This can be expected on occasion since the events that
trigger such payments will not necessarily occur on a regular basis.
20
This rebate was applicable to purchases of diesel and aviation fuel subject to federal excise tax during the 1991 and 1992 calendar years only.
21
This measure is effective for the years 1997 to 2000 inclusive.
22
This measure was introduced in 1994 and is scheduled to expire in 2000.
23
This measure was introduced in the 1995 budget and extended in the 1996, 1997, 1998 and 1999 budgets. The measure is scheduled to expire after
October 31, 2000.
24
The increase over the 1994 to 1996 period results from an increase in the amount of investment income and the introduction of an additional refundable
tax of 6b per cent effective July 1, 1995.
25
The impact of loss carry-overs can fluctuate significantly from year to year depending upon the amount of current and prior years’ losses and the availability of
income against which to apply these losses.
26
The decrease in this amount from 1994 to 1995 results from a decrease in the amount of losses available for carry-back to reduce income of prior years.
27
The increase in this amount from 1994 to 1995 results from an increase in the amount of income against which to apply losses of prior years.
28
The decrease in this amount from 1994 to 1995 results from a decrease in the amount of losses available for carry-back to reduce income of prior years.
29
The increase in this amount from 1994 to 1995 results from an increase in the amount of income against which to apply losses of prior years.
30
The decrease in the tax expenditure for meals and entertainment expenses from 1994 to 1995 results from the decrease in the deductible portion of such
expenses from 80 per cent to 50 per cent, effective after February 1994.
31
The large corporations tax rate increased to 0.225 per cent from 0.2 per cent, effective February 28, 1995. Therefore, the value of the exempt threshold
was increased for taxpayers.
32
Projections for the 1996-2001 period reflect lower commodity prices for natural resources.
33
The amount of this tax expenditure can fluctuate significantly from year to year depending primarily upon profitability and capital expenditures. These two
factors can change the payments made under the joint venture agreement with the Government of Alberta. The large decrease from 1996 to 1997 can be
attributed to changes in the joint venture agreement implemented on January 1, 1997.
Table 3
GST tax expenditures*
Estimates
1994
1995
Projections
1996
1997
1998
1999
2000
2001
($ millions)
Zero-rated goods and services
Basic groceries
2,595
2,675
2,760
2,875
3,000
3,115
3,225
3,340
Prescription drugs
275
285
300
310
320
330
340
350
Medical devices
145
150
155
160
170
175
180
185
S
S
S
S
S
S
S
S
Agricultural and fish products and purchases
Certain zero-rated purchases made by exporters
S
S
S
S
S
S
S
S
Non-taxable importations
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Zero-rated financial services
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
1,450
1,500
1,555
1,600
1,655
1,700
1,735
1,785
340
355
385
425
450
475
505
540
Tax-exempt goods and services
Long-term residential rent
Health care services
Education services (tuition)
340
350
370
395
410
430
455
480
Child care and personal services
175
180
185
200
210
215
230
240
30
30
30
30
35
40
40
40
5
5
5
5
5
5
5
5
Legal aid services
Ferry, road and bridge tolls
Municipal transit
50
50
45
45
50
50
55
55
Exemption for small business
105
105
110
120
125
125
130
130
Quick method accounting
130
135
150
160
165
170
175
180
80
85
90
90
95
95
95
100
Water and basic garbage collection services
* The elimination of a tax expenditure would not necessarily yield the full tax revenues shown in the table. See pages 42-47
for a discussion of the reasons for this.
Table 3
GST tax expenditures (cont’d.)
Estimates
1994
1995
Projections
1996
1997
1998
1999
2000
2001
($ millions)
Domestic financial services
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Certain supplies made by non-profit organizations
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Tax rebates
Rebates for book purchases made by qualifying
public institutions1
n.a.
n.a.
S
25
25
30
30
30
Housing rebates2
520
415
435
520
520
520
540
540
Rebates for foreign visitors on accommodations3
50
55
65
70
75
75
80
80
Rebates for municipalities4
530
565
540
560
560
560
560
560
Rebates for hospitals4
275
270
250
250
250
250
250
250
Rebates for schools4
290
300
285
290
290
290
290
290
universities4
120
120
115
115
115
115
115
115
Rebates for colleges4
50
55
50
45
45
45
45
45
Rebates for charities
135
140
140
140
145
150
155
160
70
70
65
60
65
65
70
70
n.a.
n.a.
n.a.
–
–
–
–
–
2,785
2,820
2,850
2,895
2,860
2,850
2,830
2,810
Rebates for
Rebates for non-profit organizations
Tax credits
Special credit for certified institutions
The GST credit5
Table 3
GST tax expenditures (cont’d.)
Estimates
1994
1995
Projections
1996
1997
1998
1999
2000
2001
110
115
115
($ millions)
Memorandum items
Meals and entertainment expenses6
115
100
105
100
105
Rebates to employees and partners
70
60
70
70
75
75
80
80
Sales of personal-use real property
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Notes
1
This measure was introduced in October 1996.
2
The sharp decline in 1995 reflects the significant weakness in residential construction in that year.
3
Estimates of this tax expenditure were derived as part of a review of the Visitors’ Rebate Program conducted during 1997.
4
Since the value of this tax expenditure is influenced by provincial budgetary decisions, the projected value of the tax expenditure for the relevant years
is simply the value estimated for 1997.
5
The decline in the GST credit between 1998 and 2001 reflects actual and anticipated growth in nominal personal income. It should be noted that the 1998 figure
is based on actual data provided by Revenue Canada.
6
The numerical approach used to derive the tax expenditure figures is tightly integrated with the tax expenditure estimates reported for the personal and
corporate tax system.
Chapter 3
FRAMEWORK AND METHODOLOGY
Introduction
The purpose of this report is to serve as a source of information for parliamentarians, government
officials and others who wish to analyze Canada’s federal income tax system and the goods and
services tax (GST). It is also an important input into the process of evaluating the operation of
these tax systems. However, it should be emphasized that this report itself does not attempt to
make judgments about either the appropriateness of government policy objectives or the
effectiveness of the various tax provisions in achieving those objectives.
The principal function of taxes is to raise the revenues necessary to finance important public
programs. This tax revenue is often raised in a way which, at the same time, implements
government policy objectives by providing assistance or incentives to particular groups of
individuals, businesses or certain types of activities. These measures, which can take the form of
tax exemptions, deductions, rate reductions, rebates, deferrals or credits, are typically referred to as tax
expenditures. This document provides historical estimates, based on a sample of taxpayer returns,
of the cost of these items for the last years for which data are available. In the case of the personal
income tax system, these are 1994, 1995 and 1996. For the corporate income tax system, they are
1994 and 1995. The GST estimates are for the years 1994 to 1997. In addition, this document
provides projections of these tax expenditures, beyond the last historical year, to 2001.
In order to identify tax expenditures, it is necessary to establish a “benchmark” tax structure
which does not contain any preferential tax provisions. Tax expenditures are then defined as
deviations from this benchmark. It is important to recognize that reasonable differences of
opinion exist as to the definition of the benchmark tax system, and hence what constitutes a tax
expenditure. For example, child care expenses could be considered to be a cost of earning income
and therefore part of the benchmark tax system; if not, then tax assistance for child care expenses
would be a tax expenditure.
This report takes a broad approach – only the most fundamental structural elements of each tax
system are considered to be part of the benchmark. By defining the benchmark in this manner,
many tax provisions are treated as tax expenditures. This approach provides information on a full
range of measures, and so allows readers who take a different position as to the appropriate
benchmark system to construct their own list of tax expenditures.
In keeping with this objective of providing as much information as possible, the document
identifies several tax provisions that are not generally considered to be tax expenditures even
though they reduce the amount of revenue collected. These measures are denoted as
“memorandum items” and have been included simply to provide additional information.
Three types of memorandum items are included.
33
CHAPTER 3
n
Measures that are considered to be part of the benchmark system. The dividend tax credit, for
example, reduces or eliminates the double taxation of income earned by corporations and
distributed to individuals through dividends.
n
Measures where there may be some debate over whether the item should be considered to be
a tax expenditure. The cost of business-related meals and entertainment, for example, may be
considered to be an expense incurred in order to earn income (and therefore be part of the
benchmark) or may be considered to provide a benefit (and therefore constitute a
tax expenditure).
n
Measures where the available data do not permit separation of the tax expenditure component
from the portion which is essentially part of the benchmark tax system. For example, a
portion of tax-free allowances for Members of Parliament (MPs) is used to cover legitimate
employment expenses (and is therefore part of the benchmark for the income tax system)
while the rest may be used for personal consumption (and is therefore an income tax
expenditure). Since it is not possible to distinguish between these two elements, the nontaxation of such allowances is included as a memorandum item.
The federal and provincial income tax and sales tax systems interact with each other to various
degrees. As a result, changes to tax expenditures in the federal system may have consequences for
provincial tax revenues. In this publication, however, any such provincial effects are not taken
into account – that is, the tax expenditure estimates are purely federal in nature.
The remainder of this chapter discusses the tax expenditure concept in order to facilitate
understanding of the quantitative estimates. It also discusses the calculation and interpretation of
the costs of tax expenditures, including key assumptions used in the analysis. Chapter 2 presented
estimates of the costs of tax expenditures and memorandum items in the personal and corporate
income tax systems and the GST.
Simplified descriptions of each tax expenditure as well as information on data sources and
methodology used in constructing the estimates are presented in Chapter 4 (personal income tax),
Chapter 5 (corporate income tax) and Chapter 6 (GST).
34
FRAMEWORK AND METHODOLOGY
What are tax expenditures?
Tax expenditures are those tax incentives that are used as alternatives to
direct government spending for achieving government policy objectives.
While there is agreement on this conceptual definition of a tax expenditure,
difficulties arise in making this definition operational. There is no widely
accepted operational methodology for estimating tax expenditures. A range
of methodologies exists internationally, some restrictive, others very broad.
The broadest of the available options is to estimate tax expenditures as all
deviations from a benchmark tax system. Typically, these deviations take
the form of exemptions, deductions, rate reductions, rebates, credits or
deferrals. It is to be expected that such a wide interpretation will produce
a list which includes many items that are not tax expenditures. It is this
interpretation of tax expenditures that is used here to provide as much
information as possible on deviations from the benchmark tax system.
Elements of Tax Expenditures in the
Personal and Corporate Income Tax Systems
The benchmark for the personal and corporate tax systems includes the existing tax rates and
brackets, unit of taxation, time frame of taxation, treatment of inflation for calculating income
and those measures designed to reduce or eliminate double taxation.
The definition of income is crucial in determining what constitutes a tax expenditure. Tax
provisions that provide for the deduction of current costs incurred to earn income are considered
to be part of the benchmark system and are therefore not considered to be tax expenditures. For
example, the deductibility of labour costs or economic depreciation of business assets in
determining business income would not be considered a tax expenditure.
It is important to emphasize that the definition of the benchmark tax structure, and hence the
identification of tax expenditures, is subjective. Reasonable differences of opinion may exist as to
the interpretation and categorization of tax measures. For example, employment insurance (EI)
premiums paid by an employee could be viewed either as an expense of earning income or as a
tax used to finance an income transfer to the unemployed. From the first perspective, the current
system of providing employees a tax credit for contributions would not be a tax expenditure. The
credit for EI premiums merely recognizes an expense of earning income and, hence, is part of the
benchmark tax structure. On the other hand, one could argue that the tax credit for EI premiums
represents a tax expenditure because the taxes paid by taxfilers are generally not deductible
against personal income taxes. For this reason the tax treatment of EI premiums is reported as a
memorandum item. Measures such as these which are subject to debate are discussed on an
individual basis in Chapters 4 and 5.
35
CHAPTER 3
The following provides a more detailed discussion of the features of the benchmark for both the
personal and corporate tax systems.
(1) Tax rates and income brackets
For the personal income tax system, the existing rate structure, including surtaxes, is taken to be
part of the benchmark system. The basic personal credit is also treated as part of this structure
since it is universal in its application and can be viewed as providing a zero rate of tax up to an
initial level of income. However, the cost of this credit is included as a memorandum item.
With respect to the corporate income tax system, effective after February 27, 1995, the basic
federal corporate tax rate is 29.12 per cent including the surtax but after the provincial abatement.
Provisions that reduce this tax rate for certain types of activities or corporations are regarded as
tax expenditures. These include the lower tax rate for manufacturing and processing profits and
the lower tax rate for small business profits; the latter is available on the first $200,000 of active
business income earned by most Canadian-controlled private corporations (CCPCs). The large
corporations tax, levied at the existing rate, is also considered to be part of the benchmark
tax system.
(2) Tax unit
Personal income taxes in Canada are based on individual income. Consequently, the individual is
taken as the benchmark tax unit for the purposes of identifying tax expenditures in this report.
This choice leads to the classification of the various provisions related to dependants, such as the
spousal credit, as tax expenditures.
The choice of the appropriate unit for the corporate income tax benchmark system raises a
number of conceptual issues. There is a wide range of possible tax units, including the
establishment or activity unit within a corporation, the single legal corporate entity and the
consolidated group of related corporations. The present income tax system contains elements of
all these approaches. For example, the view that the activity unit is the appropriate unit of
taxation is consistent with the “at-risk” rules, which restrict the amount of investment tax credits
and business losses that may be flowed out to limited partners. The view that the single legal
corporate entity is the relevant tax unit is supported by the fact that income from one part of a
business can be offset by other business losses within the same corporation, whereas losses by
one corporation may not generally be used against the income of another corporation in the
group. Other provisions in the current tax system allow corporate groups to reorganize their
corporate structures without triggering any capital gains or recaptured depreciation. These
rollover provisions lead to a deferral of capital gains and recaptured depreciation, which would be
appropriate if the taxation unit is the consolidated group of related corporations. On balance, the
view most closely related to the existing system is that of the single legal corporate entity. For
this reason, the single corporation is adopted as the benchmark tax unit, together with the
availability of various rollover provisions which permit the deferral of capital gains when a
corporate structure is changed.
36
FRAMEWORK AND METHODOLOGY
(3) Taxation period
In this document, the benchmark taxation period for the personal income tax system is the
calendar year. Accordingly, any measures that provide deferrals of taxable income to a
subsequent year are considered to be tax expenditures. For example, farmers are permitted to
defer the receipt of income from the sale of grain through the use of special cash purchase tickets,
and this is listed as a tax expenditure.
The benchmark taxation period for the corporate income tax system is the fiscal year. As with the
personal income tax system, deferrals, such as the accelerated write-off of capital assets, are
considered to be tax expenditures.
A strict application of the annual taxation period would imply that measures which provide for
the carry-over of losses to other years would be tax expenditures. However, the relatively cyclical
nature of business and investment income suggests that such income should be viewed over a
number of years. Consequently, carry-overs of business and investment losses are treated as part
of the benchmark tax system in this report. Estimates of the cost of these provisions are provided
in the memorandum items section.
(4) Treatment of inflation
Both the personal and corporate income tax systems are based on nominal income with a number
of provisions that account for the impact of inflation. Nominal income is therefore taken as the
appropriate basis for the benchmark tax system. Consequently, special measures, such as the
partial exclusion of capital gains from taxable income, which may serve to recognize inflation,
are identified as tax expenditures.
(5) Avoidance of double taxation
Conceptual difficulties arise in deciding whether certain provisions which reduce or eliminate
double taxation should be considered as tax expenditures.
For example, regarding the personal and corporate income tax systems as completely separate
would suggest that the dividend tax credit is a tax expenditure. However, the credit is an essential
feature of the overall (i.e. both corporate and personal) income tax structure and serves to
eliminate or reduce double taxation. In its absence, income earned through corporations would be
taxed twice, once in the corporation and once at the personal level. For this reason, the dividend
tax credit is not considered to be a tax expenditure.
Similarly, the non-taxation of intercorporate dividends is designed to ensure that income already
taxed in one corporation is not taxed again upon receipt of a dividend by another corporation.
Without this exemption, double taxation would occur and the corporate income tax system would
not be neutral across organizational structures. For example, consider a single corporation that
currently operates as a number of divisions. Now suppose it reorganizes into a holding company
with wholly owned subsidiaries instead of divisions. The profits from the subsidiaries flow to the
37
CHAPTER 3
holding company through intercorporate dividends. If these dividends were subject to taxation at
both the subsidiary and the holding company levels, double taxation would occur. Consequently,
the exemption of intercorporate dividends is not considered a tax expenditure.
Similar reasoning applies to the tax exemption on income of foreign affiliates of Canadian
corporations. Canada either exempts from Canadian corporate income tax certain dividend
income paid by foreign affiliates or it provides a foreign tax credit for income taxes paid in the
other country. In either case, the intention is to ensure that income is not subject to double
taxation (i.e. once in the country of residence of the foreign affiliate and once again in Canada
when the dividends are paid out). A further discussion of this topic, and the possible benchmarks
that could be considered, is contained in Chapter 5.
Information on some of these measures that provide relief from double taxation is provided in the
appropriate memorandum sections of this report.
The benchmark for the income tax system
The definition of the benchmark tax structure, and hence the identification of
tax expenditures, is subjective. The essential features of the benchmark for
income taxes in this report are:
Personal income tax
n the existing tax rates and income brackets are taken as given;
n the tax unit is the individual;
n taxation is imposed on a calendar year basis;
n nominal income (i.e. no adjustment for inflation) is used in defining
income; and
n structural features of the overall tax system, such as the dividend
gross-up and credit, are incorporated.
Corporate income tax
n the existing general tax rate is taken as given;
n the tax unit is the corporation;
n taxation is imposed on a fiscal year basis;
n nominal income (i.e. no adjustment for inflation) is used in defining
income; and
n structural features of the overall tax system, such as the non-taxation of
intercorporate dividends, are incorporated.
38
FRAMEWORK AND METHODOLOGY
Tax Expenditures in the Goods and Services Tax
1
The benchmark system used to analyze the GST is a broadly based, multi-stage, value-added tax
collected according to the destination principle and using a tax credit mechanism to relieve the
tax in the case of business inputs. The following provides a more detailed discussion of the
features of the GST benchmark.
(1) Multi-stage system
The main structural elements of a multi-stage consumption tax are taken to be part of the
benchmark. Under the multi-stage system, tax is applied to the sales of goods and services at all
stages of the production and marketing chain. At each stage, however, businesses are able to
claim tax credits to recover the tax they paid on their business inputs. In this way, the tax system
has the effect of applying the tax only to the value added by each business. Since the only tax
that is not refunded is the tax collected on sales to final consumers, the tax rests ultimately on
final consumption.
(2) Destination-based
The benchmark system applies tax only to goods and services consumed in Canada. Accordingly,
the tax applies to imports as well as domestically produced goods and services. Exports are not
subject to the tax.
(3) Single tax rate
The benchmark system has only one tax rate. This rate corresponds to the statutory rate of
7 per cent. As a result, GST provisions that depart from this single rate are considered to be
tax expenditures.
(4) Taxation period
The benchmark taxation period is the calendar year.
(5) Constitutional provisions for government sectors
Section 125 of the Constitution Act, 1867, provides that “no land or property belonging to Canada
or any province shall be liable to taxation.” This means that neither the federal nor the provincial
governments (or their Crown agents) are liable to taxation by the other. Accordingly,
constitutional immunity from taxation is recognized as part of the benchmark system for the GST.
1
It should be noted that this analysis deals only with the GST and not with other commodity taxes
(e.g. excise taxes). The exclusion of these other commodity taxes recognizes the inherent conceptual
difficulties of defining an appropriate benchmark system in the context of a tax which is applied to a
specific commodity. Work is continuing on defining an appropriate benchmark system which would
allow the future measurement of the associated tax expenditures.
39
CHAPTER 3
The benchmark also recognizes that the federal and provincial governments have taken steps to
simplify the operation of the tax for transactions involving government sectors.
n
The federal government decided to apply the GST to purchases by federal departments and
Crown corporations in order to keep the tax as simple as possible for vendors. As a result, the
GST and the benchmark system treat federal Crown corporations in the same manner as any
other business entity.
n
By virtue of Section 125, provincial governments and Crown agents are not liable to pay the
GST on their purchases. However, the federal government and most provinces have entered
into Reciprocal Tax Agreements. These agreements specify situations in which each level of
government agrees to pay the sales taxes of the other. Generally, this involves applying tax to
purchases made by Crown corporations. As a result, provincial Crown corporations are
treated like any other business entity in the benchmark system.
Unlike provincial governments, municipalities are liable to pay the GST. Therefore, the
benchmark system considers them as paying tax on their purchases. Universities, colleges,
schools and hospitals are also considered to pay tax on their purchases. The GST and the
benchmark generally treat these sectors as final consumers – that is, they pay GST on their
purchases, they do not claim input tax credits and they do not collect GST on their sales.
The only exception to this benchmark treatment arises from the fact that municipalities,
universities, colleges, schools and hospitals engage in certain commercial activities analogous
to those provided in the private sector. For example, some municipalities operate golf courses.
Such commercial activities are taxable under the GST, and the GST paid on associated inputs
can be claimed as input tax credits.
The benchmark for the goods and services tax
The essential features are:
n
basic structural features of a broadly based, multi-stage tax system;
n
destination approach;
n
7-per-cent rate;
n
calendar year basis for the taxation period; and
n
recognition of constitutional provisions for government sectors.
Types of GST tax expenditures
Comparing the actual structure of the GST to the benchmark system, it is possible to identify
four types of tax expenditures:
n
40
zero-rated goods and services;
FRAMEWORK AND METHODOLOGY
n
tax-exempt goods and services;
n
tax rebates; and
n
tax credits.
(1) Zero-rated goods and services
Under the GST, certain categories of goods and services are considered to be taxed at a “zero”
rate, rather than at the general tax rate of 7 per cent. Vendors do not charge GST on their sales of
zero-rated goods and services (whether these sales are to other businesses or to final consumers).
However, vendors are entitled to claim input tax credits to recover the GST they paid on inputs
used to produce zero-rated products. As a result, zero-rated goods and services are tax-free.
One category of zero-rated sales is basic groceries – i.e. foods intended to be prepared and
consumed at home. Other categories of zero-rated sales include prescription drugs, medical
devices and most agricultural and fish products.
(2) Tax-exempt goods and services
Some types of goods and services are exempt under the GST. This means that the GST is not
applied to these sales. Unlike zero-rated goods and services, however, vendors of exempt
products are not entitled to claim input tax credits to recover the GST they paid on their inputs to
these products.
Examples of tax-exempt goods and services include long-term residential rents, most health and
dental care services, day-care services, most sales by charities, most domestic financial services,
municipal transit and legal aid services.
(3) Tax rebates
Certain sectors are eligible for rebates on a portion of the GST paid on inputs. For example, there
are rebates for schools, universities, hospitals and municipalities. To the extent that these sectors
make taxable sales, they can claim input tax credits to recover the tax they paid on inputs to these
sales. Where they provide tax-exempt services, however, they are eligible to receive rebates for
only a portion of the GST paid on their inputs to these services. These rebates ensure that these
institutions do not bear a greater tax burden on their purchases under the GST than they would
have under the manufacturers’ sales tax, which the GST replaced. This treatment constitutes a
tax expenditure because, under the benchmark system, these institutions are considered to be
final consumers.
Other examples of tax rebates include the rebates for charities, substantially government-funded
non-profit organizations, newly built housing and book purchases made by qualifying institutions.
Also, foreign visitors to Canada are able to claim a rebate for the GST they pay on hotel
accommodation and on goods they take home. Only the rebate for hotel accommodation is
considered to be a tax expenditure, however, because goods taken home by foreign visitors are
effectively exports which are not taxable under the benchmark system.
41
CHAPTER 3
2
(4) GST credit
To ensure that the GST system is fair, a GST credit is provided through the personal income tax
system to single individuals and families with low and moderate incomes. The credit is paid by
cheque four times a year in equal instalments. The total amount of the credit people receive
depends on family size and income, and it is calculated annually based on information provided
in personal income tax returns.
GST tax expenditures:
n
zero-rated goods and services;
n
tax-exempt goods and services;
n
tax rebates; and
n
tax credits.
Memorandum items for the goods and services tax
As indicated earlier, some tax measures are presented as memorandum items even though they
are not generally considered to be tax expenditures. For example, the refund of GST for certain
employees’ expenses is included as a memorandum item.
Many employees, such as commission salespeople, incur significant expenses in the course of
carrying out their duties. Examples include restaurant meals and automobile expenses. Often,
such expenses are not reimbursed by employers except indirectly through the salaries and
commissions paid to employees. Since employees are not considered to be carrying on a
commercial activity, they are not able to claim input tax credits for the GST they paid on these
expenses. However, employees can receive a refund of the GST paid on those employment
expenses that are deductible for income tax purposes. The refund of GST paid on employees’
personal consumption expenses would constitute a tax expenditure. However, it is not possible to
determine exactly what portion of these expenses should be considered personal consumption.
Therefore, the refunds of GST paid on employees’ expenses are reported as memorandum items.
The memorandum items for the GST are discussed in more detail in Chapter 6.
Calculation and Interpretation of the Estimates
The estimates indicate the annual cash-flow impact to the government of each particular measure,
and not their long-run or steady-state revenue cost, subject to the following limitations:
n
all measures are evaluated independently; and
n
all other factors remain unchanged.
2
It should be noted that there was a small business transitional credit which accompanied the introduction
of the GST. This temporary measure provided a one-time credit of up to $1,000 to GST registrants whose
taxable sales did not exceed $500,000 in their first full quarter of 1991 or in any three-month period
beginning in 1990.
42
FRAMEWORK AND METHODOLOGY
These methodological distinctions are important and have implications for the interpretation of
the estimates. These concepts are discussed in further detail below.
Independent estimates
The estimate of the cost of each tax expenditure is undertaken separately, assuming that all other
tax provisions remain unchanged. An important implication of this is that the estimates cannot be
meaningfully aggregated to determine the total cost of a particular group of tax expenditures or of
all tax expenditures combined.
As explained in more detail in the following paragraphs, this restriction arises from the fact that:
n
the income tax rate structure is progressive; and
n
tax measures interact with one another.
Progressive income tax rates
The combined effect of claiming a number of income tax exemptions and deductions may be to
move an individual to a lower tax bracket than would have applied had none of the tax measures
existed. To the extent that this occurs, aggregation of the individual estimates may underrepresent the “true” cost to the federal government of maintaining all of them. For example,
consider a taxpayer whose taxable income was $1,000 below the level at which he or she would
move from the 17-per-cent into the 26-per-cent tax bracket. Imagine that this taxpayer arrives at
this level of taxable income by using two tax deductions of $1,000 each (e.g. home relocation
loan and registered retirement savings plan (RRSP) contribution). Eliminating either deduction by
itself would increase taxable income by $1,000 and the taxpayer’s federal tax liability by $170.
Eliminating both measures simultaneously, however, would not raise the tax liability by
$170 + $170, but rather by $170 + $260.
Aggregating the individual estimates for these two items would provide a misleading impression
of the revenue impact of eliminating both of them. Therefore, the estimates in this document
cannot be meaningfully aggregated to determine the total cost of a particular group of tax
expenditures or of all tax expenditures combined.
While there is only one statutory tax rate for corporations, the small business deduction creates a
de facto progressive tax rate schedule for some corporations. In this way, the above argument is
valid for the corporate income tax system as well, although the effect is not as large as for
personal income taxes.
Interaction of tax measures
As noted above, the estimates are computed one at a time, assuming all other provisions remain
unchanged. Given that tax provisions sometimes interact, the total cost of a group of tax
expenditures calculated individually may differ from the dollar value of calculating the cost of
the same group of tax expenditures concurrently. This is because adding the independently
43
CHAPTER 3
estimated costs of the tax provisions would result in double counting and so would not provide
an accurate measure of the revenue which would be generated by simultaneously altering a group
of measures.
For example, consider the non-taxation of veterans’ allowances, which reduces the recipient’s net
income. Many measures, such as the medical expense credit, are calculated on the basis of net
income. Thus, the reported estimate for the non-taxation of veterans’ allowances represents not
only the direct impact on government receipts of not taxing the allowances, but also the indirect
impact of the change on the cost of other tax measures (such as the medical expense credit) which
depend on net income.
Since estimates for GST tax expenditures are made using the same methodological approach as
for income taxes, they too cannot be aggregated because they may interact. The following
discussion of hospital rebates and zero-rating of prescription drugs illustrates the differences
between independent and concurrent estimates for these two provisions.
n
Eliminating hospital rebates: If hospital rebates were eliminated, hospitals would no longer be
able to recover 83 per cent of the GST they pay on their purchases.3 However, they could
continue to purchase prescription drugs on a tax-free basis because these drugs are zero-rated.
The estimate for hospital rebates recognizes that the rebate would not have been claimed in
respect of zero-rated prescription drugs.
n
Eliminating the zero-rating of prescription drugs: If prescription drugs were taxed at the
GST rate of 7 per cent, then hospitals would pay the tax on their drug purchases but recover
83 per cent of the tax through the rebate system. Therefore, the estimate for the zero-rating
of prescription drugs is calculated as net of the expected increase in the payment of
hospital rebates.
n
Eliminating the two measures concurrently has a revenue impact greater than the sum of
the independent estimates because the GST would be payable on prescription drugs, and
hospitals would be unable to claim a rebate for these purchases.
3
Most services provided by hospitals are exempt from the GST. This means that no tax is charged on these
services but input tax credits cannot be claimed to recover the tax paid on inputs. However, hospitals are
able to claim a rebate of 83 per cent of the GST paid on the inputs they use to provide exempt services.
44
FRAMEWORK AND METHODOLOGY
Aggregation of estimates
The estimates for individual tax expenditures cannot be added together to
determine the cost of a group of tax expenditures. There are two reasons
for this:
n
the simultaneous elimination of more than one income tax expenditure
would generate different estimates because of progressive income tax
rates; and
n
given the interaction of certain tax measures, the revenue impact of
eliminating two or more measures simultaneously would differ from
taking the independently estimated numbers published in this document
and simply aggregating them.
All other factors remain unchanged
The estimates in this report represent the amount by which federal tax revenues were reduced due
to the existence of each preference assuming that all other factors remain unchanged.
In order to evaluate the extent of the revenue reduction, the approach taken here is to recalculate
federal revenues assuming the measure in question has been eliminated. The difference between
this recalculated figure and actual revenues provides the quantitative estimate of the cost of the
tax expenditure.
The assumption that all other things remain the same means that no allowance is made for:
(1) behavioural responses by taxpayers; (2) consequential government policy changes; or
(3) changes in tax collections due to altered levels of aggregate economic activity which might
result from the elimination of a particular tax measure (further detail is provided below).
Incorporating these factors would add a large subjective element to the calculations.
(1) Absence of behavioural responses
In many instances, the removal of a tax expenditure would cause taxpayers to rearrange their
affairs to minimize the amount of extra tax they would have to pay, perhaps by making greater
use of other tax measures. Therefore, the omission of behavioural responses in the estimating
methodology generates cost estimates which may exceed the revenue increases that would have
resulted if a particular provision had been eliminated.
As one example, consider the case of the deduction for RRSP contributions. Eliminating this
provision would result in the amount of additional federal revenue indicated in the report only if
the contributions were not directed to an alternative tax-preferred form of saving. However, the
absence of the RRSP deduction might encourage individuals to place their funds instead in some
other tax-favoured instrument, such as shares in a labour-sponsored venture capital corporation.
45
CHAPTER 3
If such a response did occur, eliminating the RRSP deduction would result in a smaller increase
in revenues than that indicated.
The effects of this assumption can also be illustrated for the GST by considering the housing
rebate. Homeowners are eligible for a rebate of the GST they pay on the purchase of new houses.
If this rebate were eliminated, the price of new houses would increase relative to the price of used
houses. This, in turn, might reduce the demand for new houses while increasing the demand for
used houses (which are tax exempt). Since the dynamics of the housing market are not taken into
account, the revenues obtained by eliminating the housing rebate could actually be lower than the
indicated estimate.
(2) Consequential government policy changes
The estimates ignore transitional provisions that might accompany the elimination of a particular
measure and take no account of other consequential changes in government policy. For example,
if the government were to eliminate a particular tax deferral, it could require the deferred amount
to be brought into income immediately. Alternatively, it might prohibit new deferrals but allow
existing amounts to continue to be deferred, perhaps for a specified period of time. The estimates
in this report do not provide for any such transitional relief.
Similarly, the estimates make no allowance for consequential government policy changes. For
example, if capital gains on owner-occupied housing were made taxable under the personal
income tax system, an argument could be made that the cost of maintenance should be deductible
in the same way as other investment expenses. Furthermore, it may not be possible to track and
assess small gambling winnings. This may mean that a threshold under which winnings would be
non-taxable would be required. However, in calculating the cost of providing the exemption for
lottery winnings, no allowance is made for such hypothetical consequential government
policy changes.
(3) Impact on economic activity
The estimates do not take into account the potential impact of a particular tax provision on the
overall level of economic activity and thus aggregate tax revenues. For example, although
eliminating the low corporate tax rate for manufacturing and processing could generate a
significant amount of revenue for the government, the amount of manufacturing activity could
decline, resulting in possible job losses, a reduction in taxable income and, hence, a reduction in
the aggregate amount of tax revenue collected. Furthermore, the derivation of the estimates does
not include speculation on how the government might use the additional funds available to it and
the possible impacts this could have on other tax revenues.
46
FRAMEWORK AND METHODOLOGY
How to interpret the estimates
Each estimate in this report represents the amount by which federal tax revenues
were reduced due to the tax expenditure assuming that all other factors remain
unchanged. The estimates do not take into account changes in taxpayer behaviour,
consequential government actions or feedback on aggregate tax collections through
induced changes in economic activity. Accordingly, the elimination of a tax
expenditure would not necessarily yield the full tax revenues shown in
Tables 1, 2 and 3.
Developing Historical Estimates
The majority of the personal income tax estimates in this report were computed with a personal
income tax model. This model simulates changes to the personal income tax system using the
statistical sample of tax returns collected by Revenue Canada for its annual publication Taxation
Statistics. The model estimates the revenue impact of possible tax changes by recomputing taxes
payable on the basis of adjusted values for all relevant income components, deductions and
credits. For example, the removal of the moving expense deduction would result not only in a
change in net income but also in all of the credits, such as the medical expense tax credit, whose
values depend on net income. For those tax expenditures whose costs could not be estimated
using this model alone, supplementary data were acquired from a variety of sources. Details on
data sources and the methodologies used for estimating the cost of specific personal income tax
measures are provided in Chapter 4.
A corporate income tax model was used to measure most of the corporate tax expenditures. As
with the personal income tax model, it is based on a statistical sample of tax returns collected by
Revenue Canada, and is able to recompute taxes payable on the basis of adjusted tax provisions.
This recomputation of taxes takes into account the availability of unused tax credits, tax
reductions, deductions and losses that would be used by the corporation to minimize its tax
liability. Where costs could not be estimated using this model alone, supplementary data acquired
from a variety of sources were used. Details on these sources are provided in Chapter 5.
Estimating the cost of tax deferrals presents a number of methodological difficulties since, even
though the tax is not currently received, it may be collected at some point in the future. It is
therefore necessary to derive estimates of the cost to the government of providing such a tax
deferral while at the same time ensuring comparability with the other estimates presented here.
In this report, income tax deferrals are estimated on a “current cash-flow” basis – that is, the cost
is computed as the forgone tax revenue associated with the additional net deferral in the year
(deductions for the current year less the income inclusion from previous deferrals). The estimates
thus computed provide a reasonably accurate picture of the ongoing costs of maintaining a
particular tax provision in a mature tax system. They can be aggregated over time without double
counting and are comparable to estimates of the costs associated with tax credits and deductions.
47
CHAPTER 3
The costs of the majority of the GST tax expenditures presented in this report were estimated
using a Sales Tax Model based on Statistics Canada’s input-output tables and the National
Income and Expenditure Accounts. In cases where estimates were not derived using this model,
supplementary data from a variety of sources were used. Details on both the data sources and
methodologies are provided in Chapter 6.
Developing Future Projections
As with the historical estimates, the projections represent the estimated amount by which federal
tax revenues would be reduced due to the tax expenditure, assuming that all measures are
evaluated independently. This means that the projections cannot be aggregated. In addition, it is
assumed that all other factors remain unchanged. Thus, the projections make no provision for any
behavioural change that might result from the removal of the provision; for any consequential
policy changes that might accompany the change; or for the possible impact of the change on
overall economic activity and thus on tax revenues. The projections do, however, take into
consideration the impact of announced tax changes.
In contrast to the estimates of tax expenditures for the historical period, when values of the tax
expenditures can generally be obtained from tax statistics or other historical data, projections
of tax expenditures must rely on estimated relationships between tax expenditures and
explanatory economic variables. Using these relationships, the values for the explanatory
variables are projected into the future and so permit an estimation of the future expected values of
tax expenditures. Key explanatory variables are generally those reflecting the state of
the economy.
Projections for the explanatory variables are based either on the 1999 budget forecasts (e.g. gross
domestic product, population, employment, corporate profits, inflation, consumer spending) or
on past trends in the tax expenditure. Where projected tax expenditures were not obtained
using these approaches, information on the alternative methodology is provided in
Chapter 4 for personal income tax, Chapter 5 for corporate income tax and Chapter 6 for
GST tax expenditures.
Any projections are inherently subject to forecast error, and quite substantial errors at times.
Those familiar with forecasts prepared for the Canadian economy or for any other economy
recognize that forecasting is not a science. Future values for key explanatory variables are based
on best judgments, and unchanged policies are assumed for the forecast period. Furthermore, the
relationships between variables that are being explained and those that provide the explanation
may not be robust and could quickly change over time. For all these reasons, the projected values
of tax expenditures should be treated as “best efforts,” which do not have any greater degree of
reliability than the variables that explain them. For example, if the level of gross domestic
product (GDP) explains a tax expenditure, one would not expect the projected level of tax
expenditure to materialize if the expected level of GDP did not occur. Even if the expected level
of GDP did occur, the level of the tax expenditure might still not materialize if, in the future,
48
FRAMEWORK AND METHODOLOGY
the relationship between the tax expenditure and GDP turns out to be different from that
estimated on average in the past. Therefore, in general, one should expect that the degree of
reliability of the projected tax expenditures should be less than that of the underlying explanatory
variables.
Comparison With Direct Expenditures
In comparing the cost of the tax expenditures in this report to direct spending estimates, it should
be noted that a dollar of tax preference is often worth substantially more to the taxpayer than
a dollar of direct spending. This results from the fact that, in most cases, government grants
(i.e. direct spending) are taxable to the recipients. For example, consider an individual facing a
marginal tax rate of 29 per cent. A deduction of $100 would be worth $29. If, instead, the
government were to provide the individual with a taxable grant of $29, after-tax income
would increase by only $20.59 since the individual would face an income tax liability of
$8.41 ($29 x 29 per cent).
The same conclusions do not always apply to tax expenditures provided to corporate taxpayers.
Consider, for example, an investment tax credit to a corporation with respect to capital equipment
acquired to carry out scientific research and experimental development in Canada. The cost to the
government of providing a 20-per-cent tax credit would, in most circumstances, be the same as it
would be if the government had provided a direct grant of 20 per cent. This is because investment
tax credits are considered to be assistance and are therefore treated in the same manner as direct
government grants or subsidies. The 20-per-cent tax credit, like a direct grant, is either included
in income, and subject to corporate income tax, or it reduces the capital or other costs deductible
by the taxpayer.
49
Chapter 4
DESCRIPTION OF PERSONAL INCOME TAX PROVISIONS
The descriptions of the specific tax measures contained in this chapter are intended as a
simplified reference and are not detailed descriptions of specific tax measures.
A number of measures which primarily affect corporations, but also unincorporated businesses,
are treated in Chapter 5 on the corporate income tax measures.
Explanations of the methodologies used to produce estimates and projections are provided where
they deviate from the standard approach of using the personal income tax simulation model
described in Chapter 3.
Culture and Recreation
Deduction for clergy residence
A taxpayer who is a full-time member of the clergy or regular minister of a religious
denomination may deduct housing costs from income for tax purposes. Where a member of the
clergy is supplied living accommodation by his/her employer or receives housing allowances,
an offsetting deduction may be claimed to the extent that this benefit is included in income.
The estimate for this item is based on the number of clergy in Canada and Statistics Canada
expenditure data on rent.
Flow-through of capital cost allowance on Canadian films
Prior to 1995, the capital cost allowance (CCA) rate generally available on films was 30 per cent,
subject to the half-year rule. On Canadian content films, the half-year rule did not apply. The
CCA could be flowed through to investors and deducted against all sources of income. An
additional allowance of up to the remaining undepreciated capital cost of the film was deductible
against an investor’s income from certified Canadian films.
Losses arising from CCA claimed at the partnership level and flowed through as limited
partnership losses are included in the “Deduction of limited partnership losses” tax expenditure.
It is estimated that 15 per cent of limited partnership losses relate to CCA on Canadian films.
The 1995 budget replaced the special tax shelter rules that applied to Canadian content films by a
12-per-cent credit that can be claimed only by certain film and video production corporations.
Transitional rules for the 1995 taxation year allowed full deductibility of undepreciated capital
cost against film income and the flow-through of the CCA to the investor only if the 12-per-cent
refundable tax credit was not claimed in respect of the production.
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CHAPTER 4
Deduction for certain contributions by individuals
who have taken vows of perpetual poverty
Where a person has taken a vow of perpetual poverty as a member of a religious order, that
person may deduct donations to the religious order up to his/her total employment and pension
income (but not investment or other income) in lieu of the charitable donations credit.
Write-off of Canadian art purchased
by unincorporated businesses
Canadian art acquired by businesses for display in an office may be depreciated on a
20-per-cent declining-balance basis even though it may depreciate at a much slower rate, and may
even appreciate.
No data are available.
Assistance for artists
Artists may deduct the costs of creating a work of art in the year the costs are incurred rather than
in the year the work of art is sold.
Artists may also elect to value a charitable gift from their inventories at any amount up to its fair
market value. This value is included in the artist’s income. The percentage of income limit for the
charitable donations tax credit does not apply.
No data are available.
Deduction for artists and musicians
Employed musicians are able to claim the cost of maintenance, rental, insurance and capital cost
allowance on musical instruments against employment income earned as a musician.
Employed artists are also entitled to deduct expenses related to their artistic endeavours up to the
lesser of $1,000 or 20 per cent of their income derived from employment in the arts.
No data are available.
Non-taxation of capital gains on gifts of cultural property
Certain objects certified as being of cultural importance to Canada are exempt from capital gains
tax if donated to a designated museum or art gallery.
Such donations amounted to $101 million in 1994 and $99 million in 1995. However, there is no
information on the portion of the value which represents capital gains.
52
DESCRIPTION OF THE PERSONAL INCOME TAX PROVISIONS
Education
Tuition fee credit
A 17-per-cent tax credit is available for tuition fees paid by students to a prescribed educational
institution. A credit is available with respect to fees paid to an institution if the total tuition fees
paid to the institution exceed $100. The 1997 budget extended the credit to most mandatory
ancillary fees imposed by post-secondary institutions, starting in 1997.
Education credit
Students who are enrolled at prescribed educational institutions on a full-time basis are entitled to
claim a tax credit of 17 per cent of an education amount. The amount was $80 for every month of
full-time attendance for 1994 and 1995, and $100 for 1996. The 1997 budget increased the
amount to $150 for 1997, and to $200 for 1998 and subsequent taxation years.
The 1998 budget proposed to extend this tax relief to part-time students for 1998 and subsequent
years. Students enrolled at an educational institution in Canada in an eligible program lasting at
least three consecutive weeks and involving a minimum of 12 hours of courses each month will
be eligible. For each qualifying month, the education amount will be $60 per month, to which the
17-per-cent credit will be applied.
Education and tuition fee credits transferred
The unused portions of the education and the tuition fee amounts may be transferred to a
supporting spouse, parent or grandparent. The maximum transfer for the two credits combined
was 17 per cent of $4,000 for taxation years 1994 and 1995 and of $5,000 for 1996 and
subsequent taxation years.
Carry-forward of education and tuition fee credits
Effective 1997, students may carry forward indefinitely, for their own use, education and
tuition fee amounts that have not been either already used by the student or transferred to a
supporting individual.
Student loan interest credit
In order to ease the burden of student debt, the 1998 budget proposed a 17-per-cent tax credit on
the interest portion of student loan payments made in a year for 1998 and subsequent years. The
credit may be claimed in the year in which it is earned or in any of the subsequent five years.
Registered education savings plans
A taxpayer may contribute to a registered education savings plan (RESP) on behalf of a
designated beneficiary (usually the taxpayer’s child). Contributions to RESPs are not deductible,
but are usually returned to the subscriber free of tax. The investment return on these funds is not
taxable until they are withdrawn for the education of the named beneficiary. In 1994 and 1995,
the annual contribution in respect of a beneficiary could not exceed $1,500, with an overall limit
53
CHAPTER 4
of $31,500. Effective 1996, the annual limit was increased to $2,000 with an overall limit of
$42,000. In 1997, the annual limit was increased to $4,000.
Starting in 1998, RESP contributors are allowed, under certain conditions, to receive investment
income from their plan either directly or through their registered retirement savings plans
(RRSPs) where beneficiaries of the plan do not pursue higher education. The income received
directly is subject to regular tax plus a deferral tax of 20 per cent while the amount transferred to
an RRSP is subject to available RRSP room as well as lifetime limitations. Prior to 1998, RESP
income could be used only for educational purposes, and was generally taxable in the hands of
the beneficiary.
Effective in 1998, the government supplements contributions to RESPs with a 20-per-cent grant
(the Canada Education Savings Grant -- CESG), subject to annual and lifetime limitations. While
this enhancement does not directly represent a tax expenditure, the grant increases the cost of the
tax expenditure to the extent that it encourages the use of RESPs.
Estimates are based on the data and projections provided by the CESG program. No data are
available for years prior to 1996.
Exemption on first $500 of scholarship, fellowship
and bursary income
The first $500 of scholarship, fellowship and bursary income is exempt from income tax.
The tax expenditures reported in the table are understated since no data are available on
individuals receiving scholarship, fellowship or bursary income of less than $500.
Deduction of teachers’ exchange fund contributions
Teachers may deduct up to $250 per year in contributions to a fund established by the Canadian
Education Association for the benefit of teachers from Commonwealth countries visiting Canada
under a teachers’ exchange agreement.
Employment
Deduction of home relocation loans
For up to five years, an offsetting deduction from taxable income is provided for the benefit
received by an employee in respect of a home relocation loan. The amount of the deduction is the
lesser of the amount included in income as a taxable benefit and the amount of the benefit that
would arise in respect of an interest-free loan of $25,000.
Non-taxation of allowances for volunteer firefighters
Volunteer firefighters were eligible to receive up to $500 per year in non-taxable allowances.
The 1998 budget proposed to replace this measure with an exemption of up to $1,000 for amounts
received by emergency service volunteers.
The estimates are based on census data.
54
DESCRIPTION OF THE PERSONAL INCOME TAX PROVISIONS
Deduction for emergency service volunteers
The 1998 budget proposed to provide a tax exemption of up to $1,000 for amounts received by
emergency service volunteers who, in their capacity as volunteers, are called upon to assist in
emergencies or disasters.
Northern residents deductions
Individuals living in prescribed areas in Canada for a specified period may claim the northern
residents deductions. The benefits consist of a residency deduction of up to $15 a day, a
deduction for two employer-provided vacation trips per year, and unlimited employer-provided
medical travel. Residents of the Northern Zone are eligible for full benefits, while residents of the
Intermediate Zone are eligible for 50 per cent of the benefits.
The current definition of prescribed areas came into force in 1991. However, the implementation
of the current system was gradual. Certain communities, which had qualified under the pre-1991
regime but which are no longer eligible under the current system, received full benefits until
1992, two-thirds benefits in 1993, one-third benefits in 1994, and zero benefits thereafter.
Communities in the Intermediate Zone which had qualified under the pre-1991 regime received
full benefits until 1992, two-thirds benefits in 1993, and 50-per-cent benefits thereafter.
Overseas employment credit
A tax credit is available to Canadian employees working abroad for more than six months in
connection with certain resource, construction, installation, agricultural or engineering projects.
The credit is equal to the tax otherwise payable on 80 per cent of the employee’s net overseas
employment income taxable in Canada (up to a maximum income of $80,000).
Employee stock options
Provided certain conditions are met, the benefits provided by employee stock options (ESOs) are
taxed at a preferential rate. A deduction equal to one-quarter of the value of the benefit from the
ESO is available to offset the tax liability on the option.
For employees of Canadian-controlled private corporations (CCPCs), the benefits accruing from
ESOs are not generally included in income until the disposition of shares acquired with the
options. However, the shares must be held for a minimum of two years to qualify for the onequarter deduction. For non-CCPCs, the benefit provided by an ESO must be included in income
when the option is exercised.
Estimates presented in the table reflect the one-quarter deduction, but not the benefit from the
deferred inclusion in income of benefits accruing under ESOs.
55
CHAPTER 4
Non-taxation of strike pay
Strike pay is non-taxable.
Statistics Canada has ceased collecting information on the amount of strike pay.
Deferral of salary through leave of absence/sabbatical plans
Employees may be entitled to defer salaries through a leave of absence/sabbatical plan. Provided
certain conditions are met by the plan, these amounts are not subject to tax until received.
No data are available.
Employee benefit plans
In certain circumstances, employers may make contributions to an “employee benefit plan” on
behalf of their employees. The employee is not required to include in income the contributions to
the plan or the investment income earned within the plan until amounts are received. Employers
may not deduct these contributions to the plan until these contributions are actually distributed to
the employees.
No data are available.
Non-taxation of certain non-monetary employment benefits
Fringe benefits provided to employees by their employers are not taxed when it is not
administratively feasible to determine the value of the benefit. Examples include merchandise
discounts, subsidized recreational facilities offered to all employees and special clothing.
No data are available.
Family
Spousal credit
A taxpayer supporting a spouse is entitled to a tax credit of 17 per cent of $5,380. This credit is
reduced by 17 per cent of the amount by which the dependent spouse’s income exceeds $538.
The 1999 budget proposes to increase the maximum amount of the credit to 17 per cent of $6,055
and to raise the threshold at which the credit amount begins to be reduced to $606, effective
July 1, 1999.
Effective with the 1993 taxation year, the definition of spouse for tax purposes has been expanded
to include common-law spouses, provided that the couple has lived together at least one year or
has a common child.
Equivalent-to-spouse credit
An “equivalent-to-spouse” tax credit may be claimed in respect of a dependent child under age 18
or a parent or grandparent by taxpayers without a spouse. The amount of the credit and the
56
DESCRIPTION OF THE PERSONAL INCOME TAX PROVISIONS
limitation on the dependant’s income are the same as for the spousal credit. The 1999 budget
proposal to increase the spousal credit will also apply to the equivalent-to-spouse credit.
Infirm dependant credit
For taxation years 1994 and 1995, taxpayers could claim the dependant credit for dependent
relatives over 17 years of age who were physically or mentally infirm. The credit was 17 per cent
of $1,583 for dependants whose income was below $2,690. The credit was reduced by 17 per cent
of the dependant’s net income in excess of that amount and was exhausted when the dependant’s
net income exceeded $4,273.
Effective in the 1996 taxation year, the amount on which the credit is based is $2,353 and the
credit begins to be phased out at $4,103.
Caregiver credit
The 1998 budget proposed to provide a caregiver tax credit of up to $400 for individuals residing
with, and providing in-home care for, an elderly parent or grandparent or an infirm dependent
relative. The credit amount will be reduced by the dependant’s net income in excess of $11,500.
This measure is effective for 1998 and subsequent years.
Canada Child Tax Benefit
The Canada Child Tax Benefit (CCTB) was introduced in 1993 (until July 1998, it was called
the Child Tax Benefit), replacing the family allowance, the dependant credit for children under
18 years of age and the refundable child tax credit. The CCTB payments are made monthly and
are non-taxable.
The CCTB has two key components, i.e. the base benefit and the National Child Benefit (NCB)
supplement. The base benefit provides a basic amount of up to $1,020 per child, plus $75 for the
third and subsequent child. It also includes a supplement of $213 for each child under age 7, the
total of which is reduced by 25 per cent of child care expenses claimed. The total base benefit is
reduced by 5 per cent (2.5 per cent for one-child families) of family net income over $25,921.
The NCB supplement provides maximum benefits of $605 for the first child, $405 for the second
child and $330 for each subsequent child. The NCB supplement is reduced by 11 per cent for a
one-child family, 19.7 per cent for a two-child family and 27.6 per cent for larger families with
incomes over $20,921. The NCB supplement is completely eliminated at $25,921.
The CCTB was changed in the 1997 and 1998 budgets as follows:
−
In July 1997, the Working Income Supplement (WIS) was enriched and restructured. The
maximum benefit under the WIS increased from $500 per family to $605 for the first child,
$405 for the second child and $330 for each subsequent child.
−
In July 1998, the NCB supplement replaced the WIS. The maximum NCB supplement was
fixed at $605 for the first child, $405 for the second child and $330 for each subsequent child.
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CHAPTER 4
The 1999 budget, released February 16, proposed changes to both the NCB supplement and the
base benefit.
−
In July 1999, the NCB supplement will increase by $180 per child, to reach $785 for the first
child, $585 for the second child and $510 for each subsequent child. The threshold at which
the NCB supplement is fully phased out will be extended to $27,750 from $25,921.
−
In July 2000, the NCB supplement will increase by an additional $170 per child, to reach
$955 for the first child, $755 for the second child and $680 for each subsequent child. The
threshold at which the NCB supplement is fully phased out will be extended to $29,590
from $27,750.
Also in July 2000, the income threshold at which the base benefit begins to be phased out will be
increased to $29,590 from its current level of $25,921. This will provide increased benefits to
2 million families with income over $25,921.
Deferral of capital gains through transfers to a spouse,
spousal trust or family trust
Individuals may transfer capital property to their spouses or spousal trusts at the adjusted cost
base of the property rather than the fair market value. This provides a deferral of the capital gain
until the subsequent disposition of the property or until the transferee spouse dies.
Property transferred to other family members or to unrelated individuals (or to trusts of which
they are beneficiaries) is treated differently. The transferor is generally deemed to have disposed
of the property at the time of transfer at fair market value and must include any resulting capital
gain in income at that time.
In the case of property transferred to a trust (other than a spousal trust), capital gains are generally
considered to be realized at the time of the transfer on the basis of the fair market value of the
property at that time. In addition, trust assets are generally subject to a deemed realization every
21 years at the fair market value of the assets. The 21-year deemed realization date was deferred
for certain electing trusts. However, the 1995 budget eliminated this election and prevents any
deferral of the 21-year realization beyond January 1, 1999.
Farming and Fishing
$500,000 lifetime capital gains exemption for farm property
A $500,000 lifetime capital gains exemption is available for gains in respect of the disposition of
qualified farm property. The $500,000 limit is reduced to the extent that the basic $100,000
lifetime capital gains exemption (where applicable) and the $500,000 lifetime capital gains
exemption on small business shares have been used. Further, it can be applied only to the extent
that the gains exceed cumulative net investment losses incurred after 1987.
58
DESCRIPTION OF THE PERSONAL INCOME TAX PROVISIONS
Net Income Stabilization Account
Farmers may deposit a percentage of a given year’s eligible net sales, up to a limit, to their
Net Income Stabilization Account (NISA). No tax deduction is given in respect of these deposits.
Some of the deposits are matchable by the federal and provincial governments. Governments also
pay a 3-per-cent interest bonus annually on the farmer’s deposits which remain in the account.
Governments’ contributions and interest accrued in the account are not taxable until withdrawn.
All withdrawals from the NISA are taxable except for the contributor’s original deposits, which
were made with after-tax dollars. Withdrawal entitlements from the NISA are triggered if the
current year gross margin (net sales less eligible expenses) is less than the average gross margin
from previous years (up to five), or if net income is below $10,000 (or $20,000 of family net
income if the family held only one account).
The federal tax expenditure is a function of two components: the deferral of tax on the investment
income accrued in the account and on government contributions to the account; and the income
inclusion of these amounts when withdrawn from the account. The former has the effect of
increasing tax expenditures, while the latter has the opposite effect. The estimates provided in the
table are made on a current cash-flow basis – that is, they measure the impact on revenues of the
tax measure in each of the years under consideration.
Deferral of income from destruction of livestock
If the taxpayer elects, when there has been a statutory forced destruction of livestock, the income
received from the forced destruction can be deemed to be income in the following year. The
deferral is also available when the herd has been reduced by at least 15 per cent in a drought year.
This provision allows for a deferral of income to the following year when the livestock is
replaced. Under the benchmark tax system, income is taxable when it accrues.
The estimates are based on data provided by Agriculture Canada.
Deferral of income from grain sold
through cash purchase tickets
Under the cash purchase ticket program of the Canadian Wheat Board, farmers may make
deliveries of grain before the year-end and receive payment in the form of a ticket that may be
cashed in subsequent years. The payment is included in income only when the ticket is cashed.
The estimates are based on data provided by the Canadian Wheat Board.
Deferral through 10-year capital gain reserve
If proceeds from a sale of a farm property to a child, grandchild or great-grandchild are not all
receivable in the year of sale, realization of a portion of the capital gain may be deferred until the
year in which the proceeds become receivable. However, a minimum of 10 per cent of the gain
must be brought into income each year, creating a maximum 10-year reserve period. For most
other assets, the maximum reserve period is five years.
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Deferral of capital gain through
intergenerational rollovers of family farms
Sales or gifts of assets to children, grandchildren or great-grandchildren typically give rise to
taxable capital gains to the extent that the fair market value exceeds the adjusted cost base of the
property. However, capital gains on intergenerational transfers of farm property are deferred in
certain circumstances until the property is disposed of outside the immediate family.
No data are available.
Exemption from making quarterly tax instalments
Taxpayers earning business income must normally pay quarterly income tax instalments.
However, individuals engaged in farming and fishing pay two-thirds of their estimated tax
payable at the end of the taxation year and the remainder on or before April 30 of the
following year.
No data are available.
Cash basis accounting
Individuals engaged in farming and fishing may elect to include revenues when received, rather
than when earned, and deduct expenses when paid rather than when the related revenue is
reported. This treatment allows a deferral of income inclusion and a current deduction for prepaid
expenses. Under the benchmark tax structure, income is taxable when it accrues and expenses are
deductible for the period to which they relate.
No data are available.
Flexibility in inventory accounting
Farmers using the cash basis method of accounting are allowed to depart from it with regard to
their inventory. Under cash accounting, net additions to inventory are treated as a cost which is
deducted in computing income. When inventory is increasing from year to year, such costs could
create a loss for tax purposes. However, a discretionary amount not exceeding the fair market
value of farm inventory on hand at year-end may be added back to income each year. This
amount must then be deducted from income in the following year. The effect of this provision is
to allow farmers to avoid creating losses which would be subject to the time limitation if carried
forward. The value of the tax expenditure is thus the amount of tax relief associated with the
losses that would otherwise have been subject to the time limitations.
No data are available.
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DESCRIPTION OF THE PERSONAL INCOME TAX PROVISIONS
Federal-Provincial Financing Arrangements
Quebec abatement
Under the contracting-out arrangements which were offered to provinces in the mid-1960s for
certain federal transfer programs, provinces could elect to receive part of the federal contribution
in the form of a tax abatement. Quebec was the only province to elect this arrangement at the time
and this has resulted in a 16.5-percentage-point abatement of federal tax for Quebec residents.
Transfers of income tax room to provinces
In 1967, the federal government transferred tax points to all provinces in place of certain direct
cash transfers under the cost-shared program for post-secondary education. As a result, the
personal income tax abatement was increased by 4 percentage points. In 1977, an additional
9.5 percentage points of individual income tax were provided to the provinces in respect of
post-secondary, hospital insurance and medicare programs.
General Business and Investment
$100,000 lifetime capital gains exemption
The 1994 budget eliminated the $100,000 lifetime capital gains exemption (LCGE) for gains
accrued after February 22, 1994. Accrued gains prior to that date were grandfathered.
Individuals who had not disposed of their assets on that date were allowed to elect to claim
the $100,000 LCGE on their 1994 tax return for gains accrued up to February 22, 1994. They
were deemed to have disposed of their assets for an amount not exceeding their fair market value
on that date.
The LCGE allowed individuals to exempt up to $100,000 in realized capital gains over their
lifetime. The exemption was available only to the extent that the gains exceeded cumulative net
investment losses incurred after 1987. The costs of tax expenditures associated with capital gains
realized on exempt qualified farm property and exempt qualified small business shares are listed
separately, even though some of these gains would qualify for the $100,000 LCGE.
The 1992 budget had already eliminated the exemption for real estate gains accruing after
February 1992 on property not used in an active business.
Partial inclusion of capital gains
Only three-quarters of net realized capital gains are included in income.
Deduction of limited partnership losses
A limited partner is able to deduct losses against other income up to the amount of investment at
risk whereas a shareholder is normally not permitted to deduct corporate losses against personal
income. Unused losses may be carried back three years or forward seven years.
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Limited partnership losses arise from a range of investments, from real estate investments to
certified film productions. It is estimated that 15 per cent of this tax expenditure for years before
1995 is attributable to capital cost allowance claimed on Canadian films.
Investment tax credits
Tax credits are available for investments in scientific research and experimental development,
exploration activities and certain regions. The tax credits range from 15 per cent to 45 per cent.
The estimates treat the full investment tax credit as a tax expenditure even though tax credits
reduce the capital cost of assets for capital cost allowance purposes and the adjusted cost base for
capital gains purposes. A more detailed explanation is provided in Chapter 5.
Deferral through five-year capital gain reserve
If proceeds from a sale of capital property are not all receivable in the year of the sale, realization
of a portion of the capital gain may be deferred until the year in which the proceeds are received.
A minimum of 20 per cent of the gain must be brought into income each year, creating a
maximum five-year reserve period.
Deferral through capital gains rollovers
In certain circumstances, taxpayers may defer the reporting of capital gains for tax purposes.
General business rollover provisions may be categorized into three groups:
Involuntary dispositions
Capital gains resulting from an involuntary disposition (e.g. insurance proceeds received for an
asset destroyed in a fire) may be deferred if the funds are reinvested in a replacement asset within
a specified period. The capital gain is taxable upon disposition of the replacement property.
Voluntary dispositions
Capital gains resulting from the voluntary disposition of land and buildings by businesses may be
deferred if replacement properties are purchased soon thereafter (for example, a business
changing location). The rollover is generally not available for properties used to generate
rental income.
Transfers to a corporation for consideration including shares
Individuals may transfer an asset to a corporation controlled by them or their spouses and elect to
roll over any resulting capital gain or recaptured depreciation into the corporation instead of
paying tax in the year of sale.
No data are available.
Deferral through billed-basis accounting by professionals
Under accrual accounting, costs must be matched with their associated revenues. In computing
their income for tax purposes, however, professionals are allowed to elect either an accrual or
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DESCRIPTION OF THE PERSONAL INCOME TAX PROVISIONS
a billed-basis accounting method. Under the latter method, the costs of work in progress can be
written off as incurred even though the associated revenues are not brought into income until the
bill is paid or becomes receivable. This treatment gives rise to a deferral of tax.
No data are available.
Deduction of accelerated tax depreciation
The depreciation allowable for tax purposes is called capital cost allowance. It may differ from
true economic depreciation. A tax deferral may thus be created when the tax deductions in the
early years of the life of an asset exceed the actual depreciation in the value of the asset. The
difference is captured upon subsequent disposition of the asset.
The methodology for estimating this tax expenditure is explained in Chapter 5.
$1,000 capital gains exemption on personal-use property
Personal-use property is held primarily for the use and enjoyment of the owner rather than as
an investment.
In calculating the capital gain on personal-use property, if the proceeds of disposition are less
than $1,000, no capital gain needs to be reported. If the proceeds exceed this amount, the adjusted
cost base (ACB) will be deemed to be a minimum of $1,000, thus reducing the capital gain in
situations where the true ACB is less than $1,000.
No data are available.
$200 capital gains exemption on foreign exchange transactions
The first $200 of net capital gains on foreign exchange transactions is exempt from tax.
No data are available.
Taxation of capital gains upon realization
Capital gains are taxed upon the disposition of property and not when they accrue. This provides
a tax deferral.
No data are available.
Health
Non-taxation of business-paid insurance benefits
for group private health and dental plans
Employer-paid benefits for private health and dental plans are not taxable. The 1998 budget
proposed to extend this measure to allow deductions from business income of self-employed
persons for amounts paid for private health service plan coverage, subject to certain restrictions.
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The estimates are based on data from Statistics Canada and from an annual survey, entitled
Health Insurance Benefits in Canada, conducted by the Canadian Life and Health
Insurance Association.
Disability credit
Canadians who are markedly restricted by disabilities in the carrying on of the basic activities of
daily living are entitled to a tax credit. The credit is 17 per cent of $4,233. Any unused amount
of the credit may be transferred to a supporting person.
Medical expense credit
Taxpayers are entitled to a 17-per-cent credit for eligible medical expenses incurred by the
taxpayer, the taxpayer’s spouse or by dependants. The credit is available in respect of expenses
which exceed the lesser of 3 per cent of net income or $1,614. The 1998 budget proposed to allow
supporting persons to claim the medical expense tax credit for training courses related to the care
of dependent relatives with physical or mental infirmities. The 1999 budget proposes to extend
the medical expense tax credit to include certain costs of group homes for disabled persons,
certain therapies for disabled persons and tutoring and talking books for persons with
learning disabilities.
Medical expense supplement for earners
The 1997 budget created a refundable medical expense credit for low-income working Canadians
with high medical expenses.
The new refundable credit supplements the assistance that is provided through the existing
medical expense tax credit. The maximum refundable credit is the lesser of $500 and 25 per cent
of eligible medical expenses. It is available to those individuals earning over $2,500, and is
reduced by 5 per cent of net family income in excess of $16,069.
Income Maintenance and Retirement
The non-taxation of income-tested programs such as the guaranteed income supplement and
provincial social assistance presents conceptual difficulties. The problems arise because, in many
respects, these programs operate like an income tax in that eligibility for benefits is phased out
after a certain income level. In this regard, excluding such benefits from income tax might not
be considered a tax expenditure since they are subject to their own “tax.” On the other hand,
a broadly based benchmark tax system would include such amounts in income. Given
the comprehensive approach taken in this document, these items are considered to be
tax expenditures.
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DESCRIPTION OF THE PERSONAL INCOME TAX PROVISIONS
Non-taxation of guaranteed income supplement
and spouse’s allowance benefits
The guaranteed income supplement (GIS) is an income-tested benefit payable to old age security
(OAS) pensioners. Spouses of OAS recipients (or widows/widowers) between ages 60 and 64
may be eligible for the spouse’s allowance (SPA). Benefits under both the GIS and SPA
programs are non-taxable. Although GIS and SPA benefits must be included in income, an
offsetting deduction from net income is provided. This approach effectively exempts such
payments from taxation while continuing to have them affect income-tested credits.
The estimates are based on data from Human Resources Development Canada and the personal
income tax simulation model developed by the Department of Finance from tax data.
Non-taxation of social assistance benefits
Social assistance benefits must be included in income. However, an offsetting deduction from net
income is provided. This approach effectively exempts such benefits from taxation while
continuing to have them affect income-tested credits.
The estimates are based on data from Human Resources Development Canada and the personal
income tax simulation model developed by the Department of Finance from tax data.
Non-taxation of workers’ compensation benefits
Workers’ compensation benefits must be included in income. However, an offsetting deduction
from net income is provided. This approach effectively exempts such benefits from taxation while
continuing to have them affect income-tested credits.
Non-taxation of certain amounts received as damages
in respect of personal injury or death
Amounts received in respect of damages for personal injury or death and awards paid pursuant to
the authority of criminal injury compensation laws are not taxable. In addition, investment
income earned on personal injury awards is excluded from income until the end of the year in
which the person reaches the age of 21.
The values reported in the tables understate the tax expenditure since they are based on awards
paid by provinces’ Criminal Injuries Compensation Boards only. No data were available for
compensation awards paid by other sources, or regarding the investment income earned on
awards by individuals under age 22.
Non-taxation of employer-paid premiums
for group term life insurance of up to $25,000
Employer-paid premiums for group term life insurance coverage of up to $25,000 per employee
paid before July 1, 1994 were not taxable.
The 1994 budget eliminated the tax exemption, effective July 1, 1994.
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Non-taxation of veterans’ allowances, civilian war pensions
and allowances, and other service pensions
(including those from Allied countries)
These amounts are not included in income for tax purposes.
The estimates are based on public accounts data.
Non-taxation of veterans’ disability pensions
and support for dependants
These amounts are not included in income for tax purposes.
The estimates for this item are based on public accounts data.
Treatment of alimony and maintenance payments
Payments by a taxpayer to a divorced or separated spouse are deductible to the payer and taxable
in the hands of the recipient for agreements or awards made prior to May 1, 1997.
This treatment represented a tax expenditure because it departed from the benchmark system
established for the purposes of this report. Under this benchmark tax system, deductions are
permitted only for expenses incurred in order to earn income, and amounts received from other
individuals are not included in the income of the recipient.
As of May 1, 1997, child support paid pursuant to a written agreement or court order made on or
after that day will not be deductible to the payer nor included in the income of the recipient. Child
support paid pursuant to a court order or written agreement made before that date will continue to
be deductible to the payer and included in the income of the recipient, unless the agreement is varied.
The tax changes do not apply to spousal support. Spousal support payments remain deductible by
the payer and are included in the income of the recipient.
The estimates for this item are computed as the value of the deduction to the payer less the tax
collected from the recipient.
Age credit
Individual taxpayers age 65 or over are entitled to claim a tax credit of up to 17 per cent of
$3,482. Unused portions may be transferred to a spouse. The age credit became subject to an
income test in 1994. The age amount was reduced by 7.5 per cent of net income in excess of
$25,921 in 1994, and by 15 per cent for 1995 and future years.
Pension income credit
A 17-per-cent tax credit is available on up to $1,000 of certain pension income. The unused
portion of the credit may be transferred to a spouse.
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DESCRIPTION OF THE PERSONAL INCOME TAX PROVISIONS
Saskatchewan Pension Plan
Contributions to the Saskatchewan Pension Plan are deductible up to the lesser of $600 or the
amount of unused registered retirement savings plan room in a particular year.
Registered pension plans/registered retirement savings plans
The federal revenue forgone due to the provisions pertaining to registered retirement savings
plans (RRSPs), registered pension plans (RPPs) and deferred profit-sharing plans (DPSPs) is a
function of three components: the deductibility of contributions to such plans; the non-taxation of
investment income accrued within such plans; and the income inclusion of RPP/RRSP
withdrawals, which reduces the cost resulting from the previous two. Individuals benefit from a
deferral of tax on amounts contributed and on investment income. Also, there is an absolute tax
saving to the extent that the tax rate on withdrawals is below that faced at the time of
contributions. That is, many contributors are in a higher tax bracket during their working lives
than when they are retired.
As noted in Chapter 3, the estimates provided in the table are made on a current cash-flow basis –
that is, they measure the impact of the tax measure on revenues in each of the years under
consideration. The Auditor General has recommended that the estimates for RPPs and RRSPs be
provided on a present-value basis, as well the current cash-flow estimates. Work is proceeding on
developing such estimates, although they are not yet ready to be included in this year's report.
In 1991, a new system of comprehensive limits on tax-assisted retirement saving took effect.
Under this system, saving in RRSPs, RPPs and DPSPs is governed by a comprehensive limit of
18 per cent of earnings up to a dollar amount. In more detail, the limits are as follows.
n
For defined benefit pension plans, the limits are the same as in 1990 – that is, there are no
fixed limits on employee contributions while employer contributions are restricted to the
amounts necessary to fully fund the promised benefits. Annual pension benefits under these
pension plans are limited to the lesser of $1,722 and 2 per cent of earnings for each year of
pensionable service.
n
For RRSPs, contributions are limited to 18 per cent of earned income for the preceding
taxation year up to a dollar maximum ($13,500 for 1994, $14,500 for 1995 and $13,500 from
1996 to 2003), minus a pension adjustment (PA). The PA is based on RPP or DPSP benefits
earned by plan members in the previous taxation year. For a money purchase RPP or a DPSP,
the PA is simply the total contribution made by, or on behalf of, a plan member in the year.
For a defined benefit RPP, the PA is a measure of the benefits earned in the year, calculated
according to a prescribed formula.
In 1992, the federal government introduced the Home Buyers’ Plan as a temporary measure.
It allowed all individuals to withdraw up to $20,000 from their RRSPs on a tax-free basis to
purchase a home. Amounts withdrawn under the Home Buyers’ Plan are to be repaid to the
individual’s RRSP on an interest-free basis over a period of 15 years. Amounts that are not repaid
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are included in the individual’s income for tax purposes. In 1994, this measure was made
permanent, but restricted to first-time home buyers only. The 1998 budget proposed to allow
persons eligible for the disability tax credit to participate in the Home Buyers’ Plan more than
once in the individual’s lifetime. The funds must be used to purchase a home that is more
accessible for, or better suited for, the care of the individual. The impact of the Home Buyers’
Plan on the cost of RRSPs is expected to be small.
The 1998 budget also proposed to allow individuals to make tax-free RRSP withdrawals for
lifelong learning, subject to certain restrictions. Individuals will have to repay these amounts over
a fixed period of time. In many ways, this program parallels the Home Buyers’ Plan.
It should be noted that the RRSP/RPP estimates do not reflect a mature system because
contributions currently exceed withdrawals. Assuming a constant tax rate, if contributions
equalled withdrawals, only the non-taxation of investment income would contribute to the net
cost of the tax expenditure. As time goes by and more retired individuals have had the
opportunity to contribute to RRSPs throughout their lifetime, the gap between contributions and
withdrawals will shrink and possibly even become negative. The upward bias in the current cashflow estimates can therefore be expected to decline.
The estimates may not reflect the benefit to a particular individual in any given year because the
individual is typically either a contributor or withdrawer at a point in time, but not both. In order
to estimate the benefit to a particular individual, one could calculate the difference in disposable
income between a situation in which that individual invests in an RRSP/RPP and one in which
that individual invests in a non-sheltered savings instrument.
Data used to estimate the value of these measures were taken from the personal income tax
model, unpublished data from Statistics Canada, and from Statistics Canada publications
Trusteed Pension Funds (Cat. 74-201) and Pension Plans in Canada (Cat. 74-401), as well as
from the Bank of Canada Review.
Deferred profit-sharing plans
Employers may make tax-deductible contributions to a profit-sharing plan on behalf of their
employees. These amounts are taxable in the hands of the employees when withdrawals are made
from the plan. The employer’s contribution cannot exceed one-half of the money purchase
RPP dollar limit for the year ($7,250 in 1994 to 2003) or 18 per cent of the employee’s earnings.
The amount is included in the PA for the taxpayer. The taxpayer’s total PA (for both RPP and
DPSP contributions) cannot exceed the money purchase RPP dollar limit for the year ($14,500
for 1994 to 2003).
No data are available.
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DESCRIPTION OF THE PERSONAL INCOME TAX PROVISIONS
Non-taxation of RCMP pensions/compensation
in respect of injury, disability or death
Pension payments and other compensation received in respect of an injury, disability or death
associated with service in the Royal Canadian Mounted Police are non-taxable.
No data are available.
Non-taxation of up to $10,000 of death benefits
Up to $10,000 of death benefits paid by an employer to the spouse of a deceased employee is
non-taxable.
No data are available.
Non-taxation of investment income on life insurance policies
The investment income earned on some life insurance policies is not taxed as income to the
policyholder. Instead, for reasons of administrative convenience, insurance companies are subject
to tax on such earnings.
(See Chapter 5 under “Interest credited to life insurance policies” for a further description of this
measure and the corporate income tax expenditure tables for estimates of the cost of the tax
expenditure involved.)
Small Business
$500,000 lifetime capital gains exemption for small business shares
A $500,000 lifetime capital gains exemption is available for gains in respect of the disposition of
qualified small business shares. The $500,000 limit is available only to the extent that the basic
$100,000 lifetime capital gains exemption (where applicable) and the $500,000 lifetime capital gains
exemption on qualified farm property have not been used, and to the extent that the gains exceed
cumulative net investment losses incurred after 1987.
Deduction of allowable business investment losses
Under the benchmark system, capital losses arising from the disposition of shares and debts are
generally deductible only against capital gains. However, three-quarters of capital losses in
respect of shares or debts of a small business corporation (allowable business investment losses)
may be used to offset other income. Unused allowable business investment losses may be carried
back three years and forward seven years. After seven years, the loss reverts to an ordinary capital
loss and may be carried forward indefinitely.
The estimated tax expenditure is the amount of tax relief provided by allowing these losses to be
deducted from other income in the year. The tax expenditure is overestimated since it does not
reflect the future reduction in tax revenues that would occur if those losses were instead deducted
from future capital gains.
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Labour-sponsored venture capital corporations credit
A tax credit is provided to individuals for the acquisition of shares of labour-sponsored venture
capital corporations. For shares acquired before March 6, 1996, the rate of the federal credit was
20 per cent to a maximum credit of $1,000. For shares acquired after March 5, 1996, the rate
of the federal tax credit is 15 per cent, to a maximum credit of $525. In August 1998, the
government proposed to raise the maximum credit to $750, effective for 1998 and
subsequent years.
Deferral through 10-year capital gain reserve
If proceeds from the sale of small business shares to children, grandchildren or greatgrandchildren are not all receivable in the year of sale, recognition of a portion of the capital gain
realized may be deferred until the year in which the proceeds become receivable. However, a
minimum of 10 per cent of the gain must be brought into income each year creating a maximum
10-year reserve period. This contrasts with the treatment of most other property where the
maximum reserve period is five years.
Other Items
Non-taxation of capital gains on principal residences
Capital gains realized on the disposition of a taxpayer’s principal residence are non-taxable. The
capital gains were determined using Multiple Listing Service housing prices, adjusted to include
expenditures on capital repairs and major additions and renovations, obtained from Statistics
Canada’s Consumer Expenditure Survey. The holding period for principal residences was derived
from 1981 Census data.
Estimates for this item are provided for both partial and full inclusion rates for capital gains.
Non-taxation of income from the Office of the Governor General
This income is exempt from personal income taxation.
Data were provided by the Office of the Governor General.
Assistance for prospectors and grubstakers
Where a prospector or grubstaker disposes of mining property to a corporation in exchange for
shares in that corporation, the tax liability is deferred until the subsequent disposition of the
shares. At that time, only three-quarters of the amount for which the mining property was
transferred to the corporation need be included in income.
Charitable donations credit
Donations of up to 50 per cent of net income for taxation year 1996 (20 per cent prior to 1996)
made to registered charities qualified for the charitable donation credit in the year. The 1997 budget
further increased the limit for 1997 and subsequent years to 75 per cent of net income. Provision was
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DESCRIPTION OF THE PERSONAL INCOME TAX PROVISIONS
made in 1996 and maintained in the 1997 measures to ensure that no short-term tax liability would
arise from the realization of capital gains on donations of appreciated assets. This treatment was
extended by the 1997 budget to any capital cost allowance recapture arising from the donation of
depreciable capital property. Donations in excess of the limit may be carried forward for up to
five years. The percentage of income restriction does not apply to certain gifts of cultural property
nor, beginning in 1995, to donations of ecologically sensitive lands.
The credit is 17 per cent on the first $200 of total donations (including gifts to the Crown) and
29 per cent on donations in excess of $200.
Reduced inclusion rate for capital gains arising
from certain charitable donations
The 1997 budget reduced the inclusion rate on capital gains arising from certain donations by
individuals or corporations to charities (other than private charitable foundations) from 75 per cent to
372 per cent where the donation is made between February 18, 1997 and the end of the year
2001. Eligible securities qualifying for this treatment are those for which a current value can
readily be obtained and d publicly on a prescribed stock exchange.
Gifts to the Crown credit
A tax credit is available for gifts to the Crown. The credit is 17 per cent on the first $200 of total
donations (including charitable donations) and 29 per cent on donations in excess of $200. Prior
to 1997, tax credits arising from gifts to the Crown could be used to reduce taxes on up to
100 per cent of income.
The 1997 budgetreduced this to 75 per cent of income for 1997 and subsequent years. The limit is
increased by 25 per cent of the amount of taxable capital gains arising from the donations of
appreciated capital property and 25 per cent of any capital cost allowance recapture arising from
the donation of depreciable capital property. Donations of ecologically sensitive land and certain
gifts of cultural property are exempt from the net income limit. The limit does not apply to gifts
in the year of death and the preceding year. Unused contributions may be carried forward for up
to five years.
Political contribution credit
A credit is available for donations to registered federal political parties. The credit is 75 per cent
of the first $100 of contributions, 50 per cent on the next $450 of contributions and 33a per cent
on the next $600. The maximum credit claimable in any year is $500.
Retroactive lump-sum payments
The 1999 budget proposes to allow taxpayers receiving qualifying retroactive lump-sum
payments to use a special mechanism to compute the tax on those payments. To be eligible for the
special tax calculation, the right to receive the income must have existed in a prior year. In
addition, the principal portion of the lump-sum payment must be at least $3,000 and must have
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been received in any year after 1994. The tax under the special mechanism is the federal tax that
would have been payable if the principal portion of the retroactive lump-sum payment had been
taxed in the year to which it relates, plus interest, to reflect the delay in receiving the tax.
The tax expenditure under this item is equal to the difference between the tax that would be owed
on the principal portion of eligible retroactive lump-sum payments if they were taxed in the year
received, and the tax computed under the special mechanism. There is no tax expenditure
associated with the interest element of any lump-sum payment, because it is fully included in
income for the year in which it is received.
Non-taxation of income of Indians on reserves
Section 87 of the Indian Act exempts the personal property of a status Indian and Indian bands
from taxation if such personal property is situated on a reserve. Courts have held that the term
“personal property” includes income. Determining whether income is situated on a reserve
requires an examination of the factors that connect it to a reserve. With respect to employment
income, for example, a key factor is the location (on or off a reserve) at which the employment
duties were performed.
No data are available.
Non-taxation of gifts and bequests
Gifts and bequests are not included in the income of the recipient for tax purposes.
No data are available.
Memorandum Items
Non-taxation of lottery and gambling winnings
Lottery and gambling winnings are excluded from income for tax purposes.
The estimate for the non-taxation of winnings in government lotteries is based on information
provided by Statistics Canada. Values for the non-taxation of winnings from horse racing are
estimated using data provided by Agriculture Canada. The values do not include winnings from
other types of gambling, such as bingo and casino winnings, where no accurate data are available.
The tax expenditure estimate assumes that the total amount of lottery and horse racing winnings
would be included in income and subject to tax. This would likely not be the case because there
would be a large administrative cost in taxing thousands of small prizes, in particular instant win
lotteries. A threshold below which winnings would be non-taxable would result in substantially
lower revenues than the figure published in this report.
It should also be noted that proceeds from the sale of lottery tickets are an important source of
funds for provincial governments and not-for-profit organizations. As a result, there is already a
considerable element of taxation to lottery and gambling proceeds.
This estimate is therefore included as a memorandum item only.
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DESCRIPTION OF THE PERSONAL INCOME TAX PROVISIONS
Non-taxation of specified incidental expenses
Members of Parliament (MPs), Members of Legislative Assemblies (MLAs), Senators and some
other public officials (such as elected municipal officials and judges) receive flat allowances for
expenses incidental to their duties. These amounts are not included in income for tax purposes.
This provision is a memorandum item because it is not possible to distinguish the proportion
of these allowances which is used for personal consumption and that which is for workrelated expenses.
Data are available only for the non-taxable allowances provided to MPs, MLAs and Senators.
This information is found in the publications Canadian Legislatures and The Canadian
Parliamentary Guide.
Non-taxation of allowances for diplomats and
other government employees posted abroad
Diplomats and other government employees posted abroad receive an allowance to cover the
additional costs associated with living outside Canada. These allowances are not taxable.
Information on total allowances was obtained from the Treasury Board.
Child care expense deduction
Child care expenses incurred for the purpose of earning business or employment income, taking
an occupational training course or carrying on research for which a grant is received are
deductible, up to a limit. Prior to 1998, the deduction could not exceed the lesser of $5,000 per
child if the child was under age 7 or was disabled plus $3,000 per child between 7 and 14 years of
age (16 years after 1995); two-thirds of earned income for the year; and the actual amount of
child care expenses incurred. The two-thirds earned income limit does not apply to single parent
students after 1995. The deduction must generally be claimed by the spouse with the lower
income. However, the higher-income parent may claim a deduction if the lower-income parent is
infirm, confined to a bed or a wheelchair, in prison, or attending a designated educational
institution on a full-time basis.
The 1998 budget proposed to enhance the child care expense deduction by increasing the
deduction limits by $2000 to $7000 for children under age 7 or disabled, and by $1000 to $4000
for older children. The budget also proposed to allow child care expenses incurred by an
individual in order to pursue part-time education to be claimed, subject to certain limits.
Attendant care expense deduction
A disabled individual can deduct the cost of unreimbursed care provided by a part-time attendant,
if such an expense is required to enable the individual to work. For taxation years 1994 to 1997,
the deduction cannot exceed the lesser of $5,000 and two-thirds of earned income for the year.
The 1997 budget eliminated the limit on attendant care expenses.
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Moving expense deduction
All reasonable moving expenses incurred to earn employment or self-employment income at a
new location (e.g. transportation, meals and temporary accommodation, cost of selling a former
residence) are deductible from earnings or business income received after the move if the
taxpayer moves at least 40 kilometres closer to the new place of employment or study. The
deduction has to be claimed in the year, or in the following year if it exceeds earnings at the new
location in the year of the move.
Prior to 1998, most moving expense reimbursements provided by employers were not included
in income. The 1998 budget proposed to include certain employer-provided reimbursements in
income, and to allow an offsetting deduction to the same extent as permitted for self-paid
expenses. The 1998 budget also proposed to expand the definition of relocation costs eligible
for deduction.
The estimates do not include non-taxable reimbursements received from employers.
Deduction of carrying charges incurred to earn income
Interest and other carrying charges, such as investment counselling fees and safety deposit box
charges, incurred to earn business or investment income are deductible.
Some might consider the deductibility of such expenses to be a tax expenditure because of the tax
deferral arising from the up-front deduction of expenses associated with the earning of income
which will not be taxed until received possibly in future years. Others would hold that carrying
charges are incurred for the purpose of earning income and therefore represent part of the
benchmark income tax system.
Deduction of meals and entertainment expenses
Meals and entertainment expenses are considered to be a memorandum item because the amount
that should be deductible under a benchmark tax system is debatable. While a portion of these
expenditures is incurred in order to earn income, there is an element of personal consumption
associated with these expenditures. Consequently, only a partial deduction for these expenses
would be permitted under the benchmark tax system.
The deduction is limited to 50 per cent of the cost of food, beverages and entertainment
(80 per cent before March 1, 1994). Where the cost of food, beverages or entertainment is part of
a package price which includes amounts not subject to the 50-per-cent limitation – for instance,
the fee for a conference – the taxpayer is required to determine the value or make a reasonable
estimate of the amount subject to the 50-per-cent limitation.
Deduction of farm losses for part-time farmers
Individuals whose major source of income is not farming are allowed to deduct farm losses
against other income up to an annual maximum of $8,750.
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DESCRIPTION OF THE PERSONAL INCOME TAX PROVISIONS
Part-time farm losses that are not deductible in the current year may be carried back 3 years and
forward 10 years to deduct against farm or non-farm income. The estimates include the cost of
these carry-overs.
Farm and fishing loss carry-overs
Farm and fishing losses may be carried back 3 years and forward 10 years. Most other business
losses may be carried forward only 7 years.
The only data that are available are prior years’ losses carried forward to the current year. In this
regard, the estimates do not include current year losses carried forward or back to other taxation
years, nor do they include future losses carried back to the taxation year in question. The
estimates do not include losses carried over by part-time farmers.
Capital loss carry-overs
Net capital losses may be carried back three years and forward indefinitely to offset capital gains
of other years.
The only data which are available are prior years’ losses carried forward to the current year to
reduce taxes payable. The estimates do not include current-year losses carried forward or back to
other taxation years nor do they include future losses carried back to the taxation year in question.
Non-capital loss carry-overs
Non-capital losses may be carried back three years and forward seven years to offset
other income.
The only data which are available are prior years’ losses carried forward to the current year to
reduce taxes payable. Thus, the cost estimates may understate the true amount of revenue forgone
because they do not include current-year losses carried forward or back to other taxation years,
nor do they include future losses carried back to the taxation year in question.
Logging tax credit
The logging tax credit reduces federal taxes payable by the lesser of two-thirds of any logging tax
paid to a province and 6b per cent of income from logging operations in that province.
The estimates are based on data from Revenue Canada.
Deduction of resource-related expenditures
Individuals are entitled to deduct certain expenses associated with the exploration for, and
development of, Canadian natural resources. These expenses are deductible if the taxpayer either
engages directly in these resource activities or provides financing to a resource company which,
in turn, “flows through” the tax deductions to the taxpayer.
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CHAPTER 4
A tax expenditure arises when a flow-through share investor is able to use deductions for
exploration and development more quickly than would otherwise have been possible by the
resource company that actually undertook these expenditures. This may be because the taxpayer
has otherwise-taxable income in a year and the corporate issuer of the flow-through share does
not. It may also be the direct result of a special provision for junior oil and gas companies
whereby expenses that would otherwise be deductible at 30 per cent can be deducted at
100 per cent when “flowed through” using flow-through shares.
However, the available data do not permit a separation of expenses that are flowed through to
investors and those that are incurred directly by the taxpayers. Accordingly, only some portion
of resource-related expenditures deducted represents a true tax expenditure. Consequently,
the total cost of all these deductions has been calculated, but these amounts are treated as a
memorandum item.
Deduction of other employment expenses
Employees generally cannot deduct work-related expenses. However, specific employment
expenses (e.g. automobile expenses, cost of meals and lodging for certain transport employees,
legal expenses paid to collect salary) are deductible in certain circumstances in the computation
of income.
This provision is a memorandum item because it is not possible to distinguish the proportion of
these expenses which is used for personal consumption and that which is incurred in order to
earn income.
Deduction of union and professional dues
Union and professional dues are fully deductible from income.
The mandatory nature of these payments leads to their classification as expenses incurred to
earn income.
Employment insurance contribution credit/
non-taxation of employer-paid premiums
A 17-per-cent tax credit is provided for employment insurance (EI) contributions. Employer-paid
premiums are not included in the employee’s income.
The mandatory nature of EI contributions leads to their classification as expenses incurred to
earn income.
Canada and Quebec Pension Plan contribution credit/
non-taxation of employer-paid premiums
A 17-per-cent tax credit is provided for Canada Pension Plan/Quebec Pension Plan (CPP/QPP)
contributions by both employees and the self-employed. Employer-paid premiums are not
included in the employee’s income.
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DESCRIPTION OF THE PERSONAL INCOME TAX PROVISIONS
Again, since CPP/QPP contributions are mandatory, they are classified as expenses incurred to
earn income.
Foreign tax credit
In order to avoid double taxation, a tax credit is provided in recognition of income taxes paid in
foreign countries.
Dividend gross-up and credit
Dividends received from taxable Canadian corporations are “grossed up” by a factor of onequarter and included in income. A tax credit equal to 13.33 per cent of the grossed-up amount is
then provided, in recognition of taxes paid at the corporate level. These provisions contribute to
the integration of the corporate and personal income tax systems.
Supplementary low-income credit
The 1998 budget proposed a supplement of $500 to the basic personal, spousal and equivalent-tospouse non-refundable tax credits for low-income taxfilers. The supplementary amount for a
single individual will be reduced by 4 per cent of income in excess of $6,956. The total amount
available to an individual with an eligible dependant will be reduced by 4 per cent of the filer’s
income minus the total of $6,956 and the dependant’s adjusted income. The 1999 budget
proposes to extend the benefit of this credit to all taxpayers through the basic personal and
spousal/equivalent-to-spouse credits, effective July 1, 1999.
Basic personal credit
All taxpayers qualify for a basic personal credit equal to 17 per cent of $6,456. The 1999 budget
proposes to increase the basic personal credit to 17 per cent of $7,131, effective July 1, 1999.
Non-taxation of capital dividends
Private corporations may distribute the exempt one-quarter of any realized capital gains
accumulated in their “capital dividend account” to their shareholders in the form of a capital
dividend. This dividend is non-taxable. This measure is reported as a memorandum item since it
contributes to the integration of the taxation of corporate and personal income.
No data are available.
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Chapter 5
DESCRIPTION OF CORPORATE INCOME TAX PROVISIONS
The descriptions of the specific tax measures contained in this chapter are intended as a
simplified reference and are not detailed descriptions of specific tax measures.
Many of the estimates and projections are provided using the corporate income tax microsimulation model, which has been developed jointly with Revenue Canada.
Tax Rate Reductions
The following items are measures that reduce the statutory tax rate faced by a corporation. They
are considered to be tax expenditures because income is taxed at a rate other than the generally
applicable tax rate.
Low tax rate for small businesses
Corporations that are Canadian-controlled private corporations (CCPCs) are eligible for a small
business tax rate reduction, known as the small business deduction. This deduction lowers the
basic federal tax rate on the first $200,000 of active business income of CCPCs by 16 percentage
points – from 28 per cent to 12 per cent.
Effective July 1, 1994, CCPCs with more than $15 million of taxable capital employed in
Canada are no longer eligible for this rate reduction. In addition, CCPCs with between
$10 million and $15 million of taxable capital employed in Canada have reduced access to the
small business deduction.
Low tax rate for manufacturing and processing
Canadian manufacturing and processing income not eligible for the small business deduction is
subject to a reduced tax rate, known as the manufacturing and processing profits deduction. This
deduction lowers the basic federal tax rate on eligible income earned after 1993 by 7 percentage
points – from 28 per cent to 21 per cent.
For 1993, the deduction lowered the basic federal tax rate on eligible income by 6 percentage
points – from 28 per cent to 22 per cent.
The 1999 budget proposed a phased-in extension of the manufacturing and processing profits
deduction to corporations that produce electrical energy or steam for sale.
Low tax rate for credit unions
Although not a private corporation for most purposes, a credit union is eligible for the small
business deduction (i.e. 16 per cent of its taxable income). A credit union with more than
$200,000 of active business income may be eligible for a deduction of 16 per cent of its taxable
income where the total income of the corporation since 1971 is less than the corporation’s
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CHAPTER 5
“maximum cumulative reserve,” which is equal to 5 per cent of amounts owing to members
(including members’ deposits and share capital). The purpose of this tax concession is to permit a
credit union to accumulate capital on a tax-preferred basis up to a maximum of 5 per cent of
deposits and capital.
Exemption from branch tax for transportation, communications,
banking and iron ore mining corporations
The branch tax is imposed on that portion of the income of non-resident corporations derived
from the carrying on of business in Canada through a branch. If a Canadian branch has ceased
active business operations, non-residents are liable for tax on capital gains on dispositions of
taxable Canadian property. The rate is 25 per cent, but is frequently reduced by bilateral tax
treaties to 15 per cent, 10 per cent or 5 per cent.
A corporation is exempt from the branch tax if it is:
n
a bank;
n
a corporation whose principal business is:
– the transportation of persons or goods,
– communications, or
– mining iron ore in Canada; or
n
an exempt corporation such as a registered charity.
Legislation will be introduced in Parliament to make foreign bank branches subject to the branch
tax effective in 1999.
No data are available.
Exemption from tax for international banking centres
A prescribed financial institution’s branch or office carrying on certain business in the cities of
Montreal or Vancouver may qualify as an international banking centre (IBC) and therefore be
exempt from tax on its income. To qualify as an IBC under the Income Tax Act, the branch’s
income must be derived from accepting deposits and making loans to non-residents. This measure,
introduced in 1987, is considered a tax expenditure because a financial institution can undertake
business with non-residents through a Canadian permanent establishment without being subject to
Canadian income taxes.
No data are available.
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DESCRIPTION OF CORPORATE INCOME TAX PROVISIONS
Tax Credits
Investment tax credits
The following measures are credits against federal income taxes otherwise payable. They are
considered to be tax expenditures because they provide incentives to taxpayers which invest in
certain activities, such as scientific research and experimental development (SR&ED), or in
certain capital assets in designated regions of the country.
The amount of an investment tax credit (ITC) is calculated as a percentage of the cost of eligible
expenditures. ITCs can reduce federal income tax revenues in one of two ways. They may be:
n
used to offset federal income taxes otherwise payable; or
n
fully or partially refunded in the year they are incurred in the case of smaller Canadiancontrolled private corporations (CCPCs).
Prior to 1994, there was a limitation on the amount of ITCs that could be utilized in a taxation
year. Specifically, in most cases, ITCs could only be used to offset up to 75 per cent of a taxpayer’s
federal income tax and surtax otherwise payable. For CCPCs, a special rule permitted the full offset
of federal tax on their business income eligible for the small business deduction. The annual ITC
limitation had been introduced to reduce the number of large corporations that were profitable but
did not pay income tax. However, as announced in the 1993 budget, the introduction of the large
corporations tax eliminated the need for the annual ITC limitation and investment tax credits
became fully deductible for all taxpayers for taxation years beginning after 1993.
Certain ITCs earned in a year may be refunded to individuals and qualifying corporations that
cannot use them to reduce federal income taxes otherwise payable. The rate of refundability for
these ITCs is generally 40 per cent. However, a qualifying CCPC may receive a refund of
100 per cent on SR&ED ITCs earned at the 35-per-cent rate in respect of up to $2 million of
eligible current expenditures.
Prior to 1994, a qualifying corporation for the purposes of the refund was generally a CCPC
with taxable income not exceeding $200,000 in the preceding year. However, the 1993 budget
modified this rule in the case of the SR&ED ITC so that, after 1993, refundability phases out as
the prior-year taxable income of a CCPC (or associated corporate group) rises above $200,000
and is eliminated entirely at $400,000. This change was made to reduce the negative consequences of
exceeding the $200,000 limit by even a small amount. The change eases the transition between
the start-up phase and the period of expansion that small businesses typically experience and
provides more certainty to their business planning. In order to focus ITC benefits on smaller
CCPCs, the 1994 budget introduced a further change to phase out refundability after 1995 for
CCPCs with taxable capital employed in Canada exceeding $10 million and to fully eliminate
refundability for CCPCs with taxable capital employed in Canada exceeding $15 million.
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All refunds reduce the amount of ITC for carry-over purposes. Unused ITCs may be carried
forward 10 years or back 3 years.
ITCs utilized or refunded in a year reduce either the undepreciated capital cost of the asset for
capital cost allowance purposes or, in the case of SR&ED, the SR&ED pool. Credits earned in
respect of a property acquired after 1989 and not immediately available for use may not become
claimable or refundable until the property is available for use or has been held by the taxpayer
for 2 years.
Issues in calculating the value of ITCs
To maintain consistency with the other estimates in this document, the amounts reported in the
table estimate the forgone revenue for the year in question from each ITC. In other words, the
estimates show how much additional revenue would have been collected by the government in
the year if the ITC had been eliminated in that particular year. To do this, the amount of ITCs
used in the year are separated into two components: ITCs that were both earned and used in the
year, and ITCs that were earned in prior years but were carried forward and used in the year. The
former represents credits in respect of current year expenditures. The costs of any applicable
refunds of ITCs earned are included in these estimates. The latter item – ITCs earned in past years
but not used until the current year – is itemized separately as an aggregate for all ITCs.
Another perspective on the revenue cost of each ITC may be obtained by looking at the amount
of ITCs earned in a specific year. This information is provided in the following table for 1994 and
1995. However, it should be recognized that ITCs earned in the year are not necessarily used in
the year – they may be used in a subsequent or previous year, subject to the carry-over rules. As a
result, had the ITCs been eliminated, government revenues for the year would not have been
higher by the amounts shown in the following table since it may take a number of years for ITCs
earned in a year to be used by the taxpayer to reduce federal taxes.
Investment tax credits earned in the year
19941
1995
($ millions)
SR&ED ITC
1,563
1,596
Atlantic ITC
151
259
Special ITC
119
56
Small business ITC
203
0
1
These 1994 figures are based on final data and may differ from the figures in last year’s edition of this document,
which were based on preliminary data.
82
DESCRIPTION OF CORPORATE INCOME TAX PROVISIONS
SR&ED investment tax credit
There were three rates of SR&ED ITC prior to 1995: a general rate of 20 per cent; an enhanced rate of
35 per cent for CCPCs with prior-year taxable income of less than $200,000; and a rate of 30 per
cent for the Atlantic provinces and the Gaspé region. The latter rate was eliminated in the 1994
budget effective after 1994. The maximum amount of SR&ED expenditures that can earn ITCs at
the 35-per-cent rate in a year is $2 million.
The SR&ED ITC is earned on eligible current and capital expenditures in respect of SR&ED in
Canada performed by, or on behalf of, a taxpayer and related to a business of the taxpayer.
Atlantic investment tax credit
Prior to 1995, the Atlantic investment tax credit (AITC) was available at a rate of 15 per cent in
respect of eligible expenditures in the Atlantic region – i.e. Newfoundland, New Brunswick,
Nova Scotia, Prince Edward Island, the Gaspé region and their associated offshore areas. The 1994
budget reduced the AITC rate to 10 per cent for eligible expenditures incurred after 1994.
The AITC is earned on eligible expenditures on new buildings, machinery and equipment
employed in the following qualifying activities: farming, fishing, logging, mining, oil and gas, and
manufacturing and processing.
The AITC is refundable at a rate of 40 per cent for qualifying CCPCs and individuals.
Special investment tax credit
Prior to 1995, the special investment tax credit (SITC) was provided at a rate of 30 per cent for
eligible expenditures on new buildings, machinery and equipment used in qualifying activities in
qualifying regions of Canada. The SITC was eliminated in the 1994 budget, effective January 1,
1995. However, certain activities in the Atlantic region continue to be eligible for the AITC.
Qualifying activities were defined under the Regional Development Incentives Act and its
regulations, and generally included manufacturing and processing facilities located in a qualifying
region with the exception of certain primary processing of natural resources.
Qualifying regions included northeastern British Columbia, northwestern Alberta, northern
Saskatchewan, most of Manitoba, northern Ontario, northern Quebec and the Gaspé region, and
areas of Atlantic Canada.
Small business investment tax credit
The small business investment tax credit was available at a rate of 10 per cent for eligible
expenditures on machinery and equipment acquired after December 2, 1992 and before 1994 by
unincorporated businesses, partnerships and CCPCs, other than those subject to the large
corporations tax. The credit was not refundable.
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CHAPTER 5
ITCs claimed in current year but earned in prior years
These are tax credits that were earned by corporations in previous years but not claimed until the
current year. There is a revenue cost to the government when the credits are used by corporations
to reduce federal taxes payable. While the aggregate amount of these credits is known with some
confidence, there is not enough information available to identify separately the amounts for
each credit.
Political contribution tax credit
A non-refundable tax credit is available for contributions to registered federal political parties or
candidates. The credit is earned at a rate of 75 per cent on the first $100 contributed, 50 per cent
on the next $450 contributed and 33a per cent on the next $600 contributed. The maximum
credit is $500 and is available when the taxpayer has contributed $1,150.
This measure constitutes a tax expenditure because political contributions are not incurred to
earn income.
Canadian film or video production tax credit
The Canadian film or video production tax credit was introduced in the 1995 budget for certified
Canadian film productions produced by qualified corporations. It provides a refundable investment
tax credit of 25 per cent of the cost of eligible salaries and wages expended after 1994, except
where the financing of the film is eligible for transitional relief from the termination of the capital
cost allowance (CCA) film incentive. Eligible salaries and wages are limited to 48 per cent of
the cost of production, so that the credit provides assistance of up to 12 per cent of the cost
of the production. Canadian film or video productions are certified by the Minister of
Canadian Heritage.
This tax credit was intended to retarget government assistance available to Canadian film
productions in order to maximize the benefit to such productions. It replaced a tax shelter of
accelerated CCA deductions used principally by higher-income individuals, with a refundable tax
credit for eligible films produced by qualified taxable Canadian corporations.
Film or video production services tax credit
The production services tax credit applies to film or video production services that are provided
in Canada for films that do not have sufficient Canadian content to qualify for the Canadian film
or video production tax credit. It is a refundable credit of 11 per cent of salaries and wages paid to
Canadian residents for services performed in Canada after October 31, 1997. The Canadian
Audio-Visual Certification Office of Canadian Heritage provides certificates of eligibility.
84
DESCRIPTION OF CORPORATE INCOME TAX PROVISIONS
The tax credit is designed to provide economic development assistance to film and video
productions produced in Canada and to enhance Canada as a location of choice for film and video
productions. It was designed to retarget government assistance by making the benefit available
directly to the production services provider. Previously, this assistance was provided through
syndicated tax shelters for such productions.
Exemptions and Deductions
The following exemptions and deductions are considered tax expenditures because they deviate
from the benchmark tax system.
Partial inclusion of capital gains
Three-quarters of net realized capital gains are included in income. The amount of the tax
expenditure is the additional tax that would have been collected had the remaining one-quarter of
the capital gains been included in income. However, this amount is likely an overestimate of the true
amount of this tax expenditure. To the extent that the capital gains are from shares that have
increased in value due to retained earnings, and which have already been taxed at the corporate
level, the partial inclusion of the capital gains provides some relief from double taxation and,
therefore, should be part of the benchmark tax system.
The 1997 budget reduced the inclusion rate on capital gains arising from certain donations to
charities (other than private charitable foundations) from 75 per cent to 372 per cent. Donations
eligible are those of securities that are listed publicly on a recognized stock exchange in Canada,
where the donation is made between February 18, 1997 and the end of the year 2001.
Royalties and mining taxes
Non-deductibility of Crown royalties and mining taxes
The current tax system does not permit a deduction for Crown royalties or mining taxes. The
deduction has been denied since May 6, 1974. From that time to the end of 1975, oil and gas and
mining companies were eligible for a resource tax abatement, which provided a lower rate of tax
on oil and gas and mining income. A resource allowance (discussed below) was introduced in the
June 1975 budget and replaced the resource tax abatement after 1975.
A negative tax expenditure is calculated for the non-deductibility of Crown royalties and mining
taxes. A negative tax expenditure implies that the government collects more income taxes than would
have otherwise occurred in the benchmark system. The issue arises as to whether the benchmark tax
system would include a deduction for all Crown royalties and mining taxes. Two generic types of
non-deductible Crown charges are levied on the extraction of natural resources. One type is a
simple royalty system where the Crown charge is based only on gross revenues. There are also
more complex systems of Crown charges that are based on net resource profits – i.e. resource
profits after the deduction of numerous costs, including capital, operating costs and sometimes a
return on capital employed.
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In the case of Crown charges based on gross revenues, the benchmark system would include a
deduction for these royalties since they are analogous to costs of production. However, the
benchmark tax system would not include a deduction for the latter type of profit-related Crown
royalties and mining taxes because they are structured more like income taxes. Provincial income
taxes are not considered to be a deductible expense in the benchmark system. Provincial payroll
and capital taxes, on the other hand, are deductible and they are not treated as tax expenditures.
The calculations shown in this report represent the federal corporate income tax revenues generated
by the current rules which deny the deductibility of all Crown royalties and mining taxes. No
attempt has been made to divide the disallowed royalties into the two categories described above.
This is in part due to the fact that many royalty systems include characteristics of both a gross
and net calculation. Thus, the calculation represents an overestimate of the actual negative
tax expenditure.
Resource allowance
Since 1976, the income tax system has provided a resource allowance deduction equal to 25 per cent
of a taxpayer’s annual resource profits, computed after operating costs and capital cost
allowances, but before the deduction of exploration expenses, development expenses, earned
depletion and interest expenses. These latter expenses were excluded from the resource profit
calculation primarily to encourage companies to undertake exploration and development activities
in Canada. The resource allowance is provided in lieu of the deductibility of Crown royalties,
mining taxes and other charges related to oil and gas or mining production. The measure allows
the provinces room to impose royalties or mining taxes on the production of natural resources
while maintaining the federal income tax base. For analytical purposes, the value of the tax
expenditure for the royalties and mining taxes is broken down into two components:
n
the federal tax revenue earned by disallowing royalty deductibility (a negative tax
expenditure, described above); and
n
the federal tax revenue forgone resulting from the resource allowance deduction (a positive
tax expenditure).
An approximation of the overall impact of the resource allowance measure (compared to the
benchmark tax system) can be obtained by netting the two above effects.
Earned depletion
Earned depletion is an additional deduction from taxable income of certain exploration and
development expenditures and other resource investments. Prior to 1990, taxpayers were entitled
to earn an extra deduction of up to 33a per cent of most exploration and development expenses or
the costs of assets related to new mines or major expansions. The deductions for earned depletion
are generally limited to 25 per cent of the taxpayer’s annual resource profits, although mining
exploration depletion can be deducted against non-resource income. As in the case of a Canadian
86
DESCRIPTION OF CORPORATE INCOME TAX PROVISIONS
exploration expense or a Canadian development expense, earned depletion could be pooled
(i.e. placed in a special account, and any remaining balance could be carried forward indefinitely
for use in later years).
Additions to the depletion pools for earned depletion and mining exploration depletion were
eliminated as of January 1, 1990. Deductions can still be made on the basis of existing
depletion pools.
Under the benchmark tax system, a deduction for earned depletion would not be available.
Deductibility of charitable donations
Donations made by corporations to registered charities are deductible in computing taxable
income within certain limits. Unused deductions may be carried forward for up to five years.
For years prior to 1996, this deduction was limited to 20 per cent of net income. The 1996 budget
announced that the deduction limit would be raised to 50 per cent of net income plus 50 per cent
of taxable capital gains resulting from the donation of property. The 1997 budget announced a
further increase in the limit to 75 per cent of net income plus 25 per cent of the amount of taxable
capital gains arising from the donation of appreciated capital property and 25 per cent of any
capital cost allowance recapture arising from the donation of depreciable capital property.
This deduction would not be permitted under the benchmark tax system because these
expenditures are not incurred to earn income.
Deductibility of gifts to the Crown
Gifts made by corporations to Canada or a province are deductible in computing taxable income
within certain limits. Unused deductions may be carried forward for up to five years.
Prior to 1997 the amount deductible was limited only to the amount of income in a particular
year. The 1997 budget restricted the deductible amount to 75 per cent of net income plus
25 per cent of the amount of taxable capital gains arising from the donation of appreciated capital
property and 25 per cent of any capital cost allowance recapture arising from the donation of
depreciable capital property. The limit would not apply to gifts of ecologically sensitive land and
certain gifts of cultural property.
This deduction would not be permitted under the benchmark tax system because these
expenditures are not incurred to earn income.
Interest on small business financing loans
Small businesses in financial difficulty are able to treat interest paid on small business financing
(SBF) loans entered into between February 25, 1992 and the end of 1994 as a non-deductible
payment, and SBF lenders are permitted to treat the interest received as a dividend – resulting in
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CHAPTER 5
such interest being non-taxable to corporate lenders and individual lenders being eligible for a
dividend tax credit. This tax treatment permitted lenders to reduce the interest charges to such
small businesses while maintaining their after-tax rates of return.
Non-deductibility of advertising expenses in foreign media
Expenses for advertising in non-Canadian newspapers or periodicals or on non-Canadian
broadcast media cannot generally be deducted for income tax purposes if they are directed
primarily to a market in Canada. Deducting the cost of advertising in foreign periodicals or on
television stations is not restricted if the advertising is to promote sales in foreign markets.
This treatment results in a negative tax expenditure since the deduction of an expense incurred to
earn income is denied. Under the benchmark tax system, advertising expenses in foreign media
incurred to gain or produce income from a business or property would be deductible whether
targeted at foreign or domestic markets.
No data are available.
Non-taxation of provincial assistance
for venture investments in small business
Government assistance received by a corporation is normally either included in the corporation’s
income or reduces the cost basis of the assets to which the assistance relates for capital cost
allowance purposes. There are a number of exceptions to this rule, including provincial assistance
provided for venture capital investment under specified provincial programs. Under the
benchmark tax system, this type of assistance would be included in the corporation’s income or
would reduce the cost basis of the related assets.
No data are available.
Deferrals
The tax expenditures in this section provide for a deferral of income taxes from the current to a
later taxation year. They have been valued on a cash-flow basis (i.e. the forgone tax revenue
associated with the additional net deferral in the year). The alternative way of valuing deferrals
would be to calculate the value of the interest-free loan that is provided to the taxpayer when
taxes are deferred to a later year.
Accelerated write-off of capital assets
and resource-related expenditures
Under the benchmark tax system, corporations would be permitted an annual deduction for their
use of capital assets based on their anticipated economic life. Using the cash-flow approach, the
tax expenditure in any particular year would be calculated as the forgone tax revenue resulting
from the difference between the deduction taken for tax purposes, usually capital cost allowance
(CCA), and the true economic depreciation based upon the asset’s useful economic life.
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DESCRIPTION OF CORPORATE INCOME TAX PROVISIONS
These annual calculations of the impact on cash flow can provide some indication of the tax
expenditures resulting from the accelerated deductions for capital assets, but they could also be
very misleading.
Tax expenditure amounts are not provided because:
n
differences between the deductions for tax purposes and economic depreciation may not
accurately reflect the tax expenditure; and
n
adequate data are not available to calculate with any degree of accuracy this tax expenditure.
There are instances when differences between the deductions for tax purposes and economic
depreciation would not accurately reflect the tax expenditure. First, it should be noted that the
accelerated deductions for tax purposes lead only to a deferral, not a permanent reduction, of tax
payable. If CCA rates are higher than actual depreciation rates, then during the initial years, the
CCA claim would exceed economic depreciation. However, in later taxation years, the reverse
would occur (i.e. actual depreciation would exceed the amount allowed for tax purposes). These
differences between CCA and actual depreciation would lead to a positive tax expenditure in the
early years of asset ownership since higher CCA rates in the initial years are a tax incentive.
However, in later years, the CCA claim would be less than actual depreciation, resulting in a
negative tax expenditure, thus offsetting the previous tax expenditure to some extent. For the
corporate sector in total, the aggregate tax expenditure in any particular year could be positive or
negative depending upon the level of investment in the current and previous years. As a result, the
tax expenditure depends critically on the growth rate of investments. If the growth rate were zero,
then, in the long run, one would expect no tax expenditure amount since the positive tax
expenditures resulting from more recent asset acquisitions would be offset by the negative tax
expenditures resulting from older assets – that is, in total, the annual tax depreciation claimed
would be equal to the economic depreciation.
In addition, because CCA is a discretionary deduction, the cash-flow method could result in a tax
expenditure being reported even if there is no acceleration of CCA rates (i.e. the CCA rates
correspond with economic depreciation rates). A company has discretion to claim less than the
maximum amount in a particular year. As a result, in that year, the cash-flow method would result
in a negative tax expenditure. Because the company would now have a larger undepreciated
balance for tax purposes, future CCA write-offs would be larger than the corresponding economic
depreciation, thereby resulting in a positive tax expenditure in future years.
Finally, differences between CCA and economic depreciation may also result from the treatment
of dispositions. For tax purposes, assets are grouped in pools with gains or losses on disposition
adjusting the undepreciated balance, while gains and losses for economic depreciation purposes
are recognized on an asset-by-asset basis. Also, the asset cost for tax purposes may differ from
the cost for economic depreciation purposes in that, for economic depreciation purposes, interest
costs are often capitalized while, for tax purposes, such costs are generally expensed in the
year incurred.
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Because economic depreciation is difficult to determine, the deductions for capital assets reported
by companies in their financial statements are often used as a substitute. However, financial
statement depreciation may differ from economic depreciation. Furthermore, not all companies
classify the capital asset deductions as depreciation or some other readily identifiable expense.
For example, in the leasing industry, a lease may be classified as an operating lease for tax
purposes with capital cost allowance being claimed, while for accounting purposes, it may be
classified as a capital lease, in which case the corresponding accounting deduction may not be
specifically identifiable. Since the costs written off for financial statement purposes for this
sector cannot be precisely determined, it is not possible to estimate the related tax expenditure.
More generally, adequate data are not available to calculate with any degree of accuracy this
tax expenditure.
Although it may not be possible to estimate with any degree of accuracy the expenditure using
the cash-flow approach, some indication of the magnitude of the tax expenditure relating to a
particular accelerated write-off provision can be calculated by comparing the estimated
discounted present value of the tax benefits resulting from acquisitions in a particular year under
each of the two depreciation methods. For example, if the CCA rate is higher than the actual
depreciation rate, the discounted present value of the benefit of being able to claim CCA would
exceed the discounted present value of the benefit of the financial statement depreciation, thereby
resulting in a measure of the positive tax expenditure or tax incentive that has been provided.
The number of asset classes with accelerated depreciation rates was reduced significantly when
changes were introduced in 1988. As a result, many CCA rates now approximate the rate of
economic or financial statement depreciation, and the associated tax expenditure related to
accelerated depreciation provisions has been reduced. However, a few instances remain where the
CCA rates are clearly accelerated – that is, the tax system allows a larger deduction from income
for the first few years after the property is acquired than is applied for financial statement
purposes. Some of the more significant of these accelerated CCA provisions are described below
along with illustrations of the net present value of the benefit of some of the remaining
accelerated CCA provisions.
Vessels (class 7)
Vessels are generally included in class 7 and are subject to a maximum CCA rate of 15 per cent
on a declining-balance basis. Accelerated CCA on a straight-line basis at a maximum rate of
33a per cent of the capital cost of the property is available in respect of a vessel, including
furniture, fittings, radio communication equipment and other equipment if it was (a) constructed
in Canada, (b) registered in Canada, and (c) not used for any purpose whatever before acquisition
by the owner. These assets are depreciated over a four-year period, with 16b per cent written off
in the first and fourth years, and 33a per cent written off in the second and third years.
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DESCRIPTION OF CORPORATE INCOME TAX PROVISIONS
Energy-efficient equipment (classes 34 and 43.1)
Prior to the changes announced in the 1994 budget, straight-line depreciation of 25 per cent,
50 per cent and 25 per cent was applicable to certain equipment used for the generation of
electricity or the production or distribution of heat. Qualifying equipment includes equipment
designed to: produce heat derived primarily from the consumption of wood wastes or municipal
wastes; produce electrical energy by using wind energy; or recover heat that is a by-product of an
industrial process. Also included as qualifying equipment were: hydroelectric installations not
exceeding 15 megawatts; certain types of co-generation equipment; and certain types of active
solar heating equipment.
The changes announced in the 1994 budget effectively terminated additions to class 34 after
February 21, 1994, and redefined eligibility criteria. Many of the assets that had been eligible for
class 34 became eligible for a reduced depreciation rate of 30 per cent on a declining-balance
basis under class 43.1.
Class 43.1 was introduced following the termination of class 34. Eligibility for class 43.1 is
described in regulations to the Income Tax Act. In general, the following types of equipment may
qualify for inclusion in class 43.1: co-generation and specified waste-fuelled electrical generation
systems; active solar systems; small-scale hydroelectric installations; heat recovery systems;
wind energy conversion systems; photovoltaic electrical generation systems above a minimum
threshold level; geothermal electrical generation systems; and specified waste-fuelled heat
production equipment. Active solar systems, heat recovery systems and waste-fuelled heat
production equipment must be used directly in connection with an industrial process to qualify as
class 43.1 equipment. The 1999 budget proposed to include in class 43.1 equipment for the
generation of electricity from gas that would otherwise be flared during the production of
crude oil.
Class 43.1 is also subject to the “specified energy property” rules, which may reduce the amounts
that can be deducted to less than 30 per cent of the unclaimed capital cost.
Water and air pollution control property (classes 24 and 27)
Assets which are acquired primarily for the purposes of abating water or air pollution at a site are
included in class 24 or class 27, respectively. These assets are eligible for three-year straight-line
CCA of 25 per cent, 50 per cent and 25 per cent. The water and air pollution control equipment
must be new property that is used in operations that were started before 1974 and have been
continuously carried on since that time. The 1994 budget announced that additions to these
classes would be terminated after 1998.
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Mining
Certain mining buildings, machinery and equipment acquired for use at a new mine or a major
expansion of an existing mine may qualify for an accelerated CCA rate of up to 100 per cent.
A 25-per-cent increase in a mine’s capacity is generally considered to be a major expansion.
These mining assets were previously included in class 28 and depreciated at a rate of 30 per cent.
Acquisitions after 1987 are included in class 41 and depreciated at a rate of 25 per cent. In
addition to the 25-per-cent allowance provided in class 41, a taxpayer owning such property and
operating the mine may claim an additional allowance equal to the lesser of (1) the remaining
undepreciated capital cost of property of the class, or (2) the income for the year from the new or
expanded mine.
The 1996 budget announced income tax changes for oil sands projects. The objective of the
changes was to provide a more equitable tax treatment for the two different oil sands extraction
methods (mining and in situ). Mining methods involve the removal of overburden and the
transportation of bituminous sands to a central processing facility where the oil (bitumen) is
separated from the sand using hot water. With in situ operations, the oil is recovered from an
underground reservoir by the application of heat or other techniques, which make the oil more
mobile and capable of flowing from a well or wells.
The 1996 budget extended the accelerated CCA rules to the eligible depreciable capital costs for
in situ projects. The tax treatment that previously had been available only for new mines (both
mineral and oil sands) and major mine expansions was also extended to other capital investments,
including large incremental capital costs that might not otherwise qualify as a major expansion
(e.g. efficiency improvements and environmental protection). Specifically, all tangible capital
expenditures incurred for all types of mines, including oil sands projects, would qualify for accelerated
CCA to the extent that, in a year, these capital costs exceeded 5 per cent of gross revenue from
that mine or oil sands project in that year.
Exploration costs
Expenditures incurred in determining the existence, location, extent or quality of mineral
resources, and oil or gas, or incurred to develop mineral resources prior to commercial production
in Canada, are classified as a Canadian exploration expense (CEE) and are deducted for tax
purposes at a rate of 100 per cent.
Generally accepted accounting principles allow companies to depreciate exploration expenditures
on either a “full cost” or a “successful efforts” basis. The full cost method requires that all
exploration costs, whether they result in new production or not, be capitalized and amortized as
the reserves are depleted. The successful efforts method requires that only those costs which
result in the discovery of reserves and which have a benefit in terms of future revenues are
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DESCRIPTION OF CORPORATE INCOME TAX PROVISIONS
capitalized; other costs are expensed as incurred. Most Canadian-controlled companies follow the
full cost method, while foreign-controlled companies in Canada usually follow the successful
efforts method.
The 100-per-cent write-off of CEE for tax purposes is more rapid than the amounts used for
financial statement purposes, especially for successful exploration. The fast write-off for CEE
provides a deferral of tax.
Under the benchmark tax system, corporations would be permitted an immediate deduction only
for unsuccessful exploration expenditures. However, those costs associated with successful
exploratory activities (i.e. those costs that result in producing assets for both the mining and oil
and gas sectors) would be permitted a deduction based on an amortization over the life of
the asset.
Under certain conditions, corporations entering into flow-through share agreements are entitled to
reclassify limited amounts of a Canadian development expense (normally a 30-per-cent deduction
on a declining-balance basis) into a Canadian exploration expense. The tax expenditure
associated with this provision appears as a personal tax expenditure item on pages 75-76 since
these deductions are taken by the purchasers of the flow-through shares, which are
generally individuals.
Canadian Renewable and Conservation Expenses (CRCE)
This category of expenses was introduced to provide for full deductibility of certain costs
associated with the development of renewable energy projects and other projects for which the
equipment is eligible for accelerated deduction under class 43.1. Test wind turbines are also
eligible to be claimed as a CRCE expense.
CRCE can be flowed out pursuant to a flow-through share agreement. It was introduced to
provide a more equitable tax treatment for the financing of renewable and non-renewable
energy projects.
Capital equipment used for scientific research and experimental development
Eligible capital expenditures for the provision of premises, facilities or equipment used for
scientific research and experimental development in Canada may be fully deducted in the year
they are incurred. In the absence of this provision, these amounts would have been depreciable
over several years. Under the benchmark tax system, expenditures that are capital in nature and
designed to produce income in the future are depreciated over a period approximating that during
which the income is expected to arise.
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Illustration
Assuming a taxable corporation makes a $100,000 investment in an eligible asset, the net present
value of the income tax reduction resulting from accelerated CCA is presented in the following table.
This illustration is based upon a federal corporate income tax rate of 29.12 per cent (unless otherwise
indicated) and uses a discount rate of 8 per cent. The actual net present value of the reduced federal tax
resulting from accelerated CCA will vary depending upon the tax status of the corporation, its
effective tax rate and the amount of CCA actually claimed in future years. The following table
presents the maximum value of the incentive assuming that firms can fully benefit from the
accelerated CCA. The one exception is for the analysis of mining assets (see table footnote).
Vessels
Electrical generating
equipment using wind,
solar and geothermal
energy
Energy-efficient
equipment used in
manufacturing and
processing
(pre-1994 budget)
Water and air pollution
control property used
in manufacturing and
processing (pre-1999)
Mining assets
Oil sands and
in situ oil
Conventional mines
Scientific research
and experimental
development
equipment
Exploration costs
Canadian Renewable and
Conservation Expenses
1
2
3
4
Baseline tax
depreciation
rate
Net present value of
reduced federal tax resulting
from accelerated CCA
15% declining
balance
4% declining
balance
$5,800
CCA Class
Accelerated
rate
7
33a% straight-line
43.1
30% declining
balance
34
50% straight-line
30% declining
balance
$2,9002
24 and
27
50% straight-line
30% declining
balance
$2,9002
28 and
41
25% declining
balance
$500 to
$4,0003
25% declining
balance
$500 to
$1,3004
Full writeoff in year
100% (subject
to income
restriction)
100% (subject
to income
restriction)
Full write-off
in year
30% declining
balance
$4,800
Full writeoff in year
Full writeoff in year
Full write-off
in year
Full write-off
in year
30% declining
balance
30% declining
balance
$4,800
28 and
41
$9,7001
$3,7001
These amounts reflect the fully phased-in value of the 1999 budget proposal to provide, by 2002, the manufacturing and processing
deduction for the production of electrical energy for sale.
This amount is calculated without reference to the manufacturing and processing deduction.
Accelerated CCA can only be claimed against income earned by the related project, not against total corporate income. The income
of the project, in turn, depends inter alia on prices for oil/minerals. Therefore, the net present value of the federal tax reduction
resulting from claiming accelerated CCA varies depending upon the amount of project income against which CCA may be claimed.
These estimates are based on the operating results of a range of existing and proposed oil sands mining and in situ oil sands projects
as obtained from industry sources. The calculations result in a range of $500 to $4,000 per $100,000 investment; however, most oil
sands projects would generally fall between $700 and $2,500.
For conventional mines, the analysis was based on hypothetical mine models developed by Natural Resources Canada.
These models include a range of low and high profitability metal mines.
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DESCRIPTION OF CORPORATE INCOME TAX PROVISIONS
Allowable business investment losses
Capital losses arising from the disposition of shares and debts are generally deductible only
against capital gains. However, under the allowable business investment loss rules, three-quarters
of capital losses in respect of shares or debts of a small business corporation may be used to offset
other income.
Unused allowable business investment losses may be carried back three years and forward seven
years. After seven years, the loss reverts to a capital loss and may be carried forward indefinitely.
The value of the tax expenditure is the amount of tax relief provided by allowing these losses to
be deducted from other income in the year rather than being deducted against uncertain taxable
capital gains in the future.
Holdback on progress payments to contractors
In the construction industry, contractors are typically given progress payments as construction
proceeds. However, a portion of these progress payments (e.g. 10 per cent to 15 per cent) is often
held back until the entire project is completed satisfactorily. The amount held back need not be
brought into the income of the contractor until the project to which it applies is certified as
complete, rather than when earned, as would be required in the benchmark tax structure. Where a
contractor, in turn, withholds an amount from a subcontractor, costs equal to the amount of the
holdback are not considered to have been incurred by the contractor and are not deductible until
paid. The net impact of these two measures on a given contractor’s tax liability depends on the
ratio of holdbacks payable to holdbacks receivable. If holdbacks receivable are greater than
holdbacks payable, there is a deferral of tax. If holdbacks payable exceed holdbacks receivable,
there is a prepayment of taxes.
Increases in net holdbacks receivable or decreases in net holdbacks payable result in a positive
estimate of the amount of the tax expenditure. Increases in net holdbacks payable or decreases in
net holdbacks receivable result in a negative estimate.
Available for use
Taxpayers may claim capital cost allowance (CCA) and investment tax credits (ITCs) on eligible
property at the earlier of the time it is put in use or in the second taxation year following the year
of acquisition. Property that becomes eligible for CCA and ITCs by virtue of the two-year
deferral rule could result in a significant mismatch of revenues and expenses which give rise to a
tax deferral. This is a tax expenditure because taxpayers are allowed to claim deductions and tax
credits on property before it is put in use.
No data are available as assets are pooled into classes and are not accounted for separately.
Furthermore, assets are not identified as being “available for use” or “not available for use.”
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Capital gains taxation on realization basis
Capital gains are taxed upon the disposition of property and not on an accrual basis. This
treatment results in a tax deferral. Furthermore, certain rollover mechanisms such as
share-for-share exchange provisions extend the period of tax deferral. Under the benchmark
tax system, capital gains would be fully included in income as they accrue.
However, since 1994, financial institutions and investment dealers have been required to report
gains and losses on certain securities on an accrual basis (i.e. mark to market).
No data are available.
Expensing of advertising costs
Advertising expenses are deductible on a current basis even though some of these expenditures
provide a benefit in the future. Under the benchmark tax system, the expenses would be
amortized over the benefit period.
The estimates provided are based upon the assumption that 25 per cent of advertising costs
incurred in a particular year provide a benefit in the following two years. Since tax expenditures
are estimated on a cash-flow basis, an increase in annual advertising costs would result in a
positive estimate of the tax expenditure. Decreases in annual advertising costs would result in a
negative estimate of the tax expenditure.
Deductibility of contributions to mine reclamation
and environmental trusts
Certain environmentally sensitive activities can disturb the natural environment in the area where
the activity takes place, and measures may need to be taken to repair the environmental damage
after operations have terminated. In these situations, governments may require companies to set
aside funds in advance in trust funds to ensure that adequate amounts are available to conduct
restoration activities at the end of operations.
The 1994 budget permitted a deduction of required contributions to mine reclamation trusts in the
year in which they are made rather than permitting a deduction only when the mine reclamation
costs are actually incurred. Income earned in such trusts is subject to tax each year. When actual
reclamation costs are incurred, any withdrawal of funds from the trust will be included in income
subject to tax and the actual reclamation costs will be deductible. The 1997 budget extended this
treatment to similar funds established for waste disposal sites and quarries for the extraction of
aggregate and other similar substances.
The overall effect is to advance the timing of the deduction in respect of reclamation expenses.
The value of the tax expenditure is the amount of tax relief that is effectively provided by
allowing payments to be deducted from income when contributions are made to the trust. This tax
expenditure could be positive or negative depending upon the amount of contributions to and
withdrawals from these trusts in a particular year.
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DESCRIPTION OF CORPORATE INCOME TAX PROVISIONS
Deductibility of countervailing and anti-dumping duties
In accordance with the rules established under the World Trade Organization, countervailing and
anti-dumping duties may be imposed by countries to offset the injurious effects of imports which
are subsidized or dumped. These actions may result in Canadian taxpayers paying such amounts
in order to export their products. The 1998 budget proposed that cash outlays for duties be
deductible in computing income subject to tax in the year they are paid even though these
amounts may be refunded, in whole or in part, in a subsequent year. Any refunds or additional
amounts subsequently received, such as interest, would have to be included in income in the year
of receipt.
The value of the tax expenditure is the amount of tax relief provided by allowing these contingent
costs to be deducted from income when paid rather than when the exact amount, if any, of the
duty is determined. This tax expenditure could be positive or negative depending upon the
amount of countervailing duties paid and recovered by firms in a particular year.
No forecasts have been made of the future tax expenditure amounts since it is not possible to
determine the cost of future trade actions affecting Canadian taxpayers.
Deductibility of earthquake reserves
In 1997, the Office of the Superintendent of Financial Institutions introduced new guidelines that
require federally regulated insurance companies to meet target levels of preparedness to ensure
they have sufficient financial capacity to pay insured earthquake losses when they occur. The
appendix to the guidelines proposes an earthquake reserve to be composed of two parts: the first
element, the “earthquake premium reserve,” is based on a percentage of net earthquake premiums
written; the second element, the “earthquake reserve complement,” takes into account the
earthquake exposure reinsured with another insurance company and a proportion of the capital
and surplus of the company. The 1998 budget proposed that the “earthquake premium reserve”
would be deductible for income tax purposes. Under the benchmark system, such reserves would
not be deductible.
Cash basis accounting
Farming and fishing corporations may elect to include revenues as received, rather than when
earned, and deduct expenses when paid rather than when the related revenue is reported. This
treatment allows a deferral of income and a current deduction for prepaid expenses. Under the
benchmark tax structure, income is taxable when it accrues.
No data are available.
Flexibility in inventory accounting
Farm corporations using the cash basis method of accounting are allowed to depart from it with
regard to their inventory. A discretionary amount, not exceeding the fair market value of farm
inventory on hand at year-end, may be added back to income each year. This amount must then
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be deducted from income in the following year. The effect of this provision is to allow farm
corporations to avoid creating losses which, if carried forward, would be subject to the time
limitation. Thus, the tax expenditure provides tax relief to the extent that the losses would
otherwise have been subject to the time limitations.
No data are available.
Deferral of income from grain sold through cash purchase tickets
Farmers may make deliveries of grain before the year-end and be paid with a ticket that may be
cashed only in the following year. The payment for deliveries of grain is included in income only
when the ticket is cashed, thereby providing a deferral of taxes. Under the benchmark tax system,
income would be taxed on an accrual basis.
The estimates are based on data provided by the Canadian Wheat Board. Since tax expenditures
are estimated on a cash-flow basis, an increase in the balance of uncashed grain tickets represents
additional income that is being deferred and results in a positive estimate of the tax expenditure.
A decrease in the balance of uncashed grain tickets indicates that less income is being deferred
and results in a negative tax expenditure.
Deferral of income from destruction of livestock
If the taxpayer elects, when there has been a statutory forced destruction of livestock, the income
received from the forced destruction can be deemed to be income in the following year. The
deferral is also available when the herd has been reduced by at least 15 per cent in a drought year.
This provision allows for a deferral of income to the following year when the livestock is
replaced. Under the benchmark tax system, income is taxed on an accrual basis.
Deferral of tax from use of billed-basis accounting
by professionals
Under accrual accounting, costs must be matched with their associated revenues. However, in
computing their income for tax purposes, professionals are allowed to elect either an accrual or a
billed-basis accounting method. Under the latter method, the costs of work in progress can be
written off as incurred even though the associated revenues are not brought into income until the
bill is paid or becomes receivable. This treatment gives rise to a deferral of tax.
No data are available.
International
Non-taxation of life insurance companies’ world income
All Canadian corporations except Canadian multinational life insurers are taxed on their
worldwide income. Canadian multinational life insurers are taxed only on their profits from
carrying on a life insurance business in Canada using special rules in the income tax regulations.
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DESCRIPTION OF CORPORATE INCOME TAX PROVISIONS
Prior to 1993, the cost of this tax expenditure was estimated from tax returns and information
available from the Office of the Superintendent of Financial Institutions. However, information
required to estimate this tax expenditure is not available after 1992.
Exemptions from non-resident withholding tax
Canada, like other countries, imposes a withholding tax on various types of income paid to nonresidents. The basis for this tax rests on the internationally accepted principle that a country has
the right to tax income that arises or has its source in that country. The types of income subject to
non-resident withholding tax include: certain interest, dividends, rents, royalties and similar
payments; management fees; estate and trust income, alimony and support payments; and certain
pension, annuity and other payments.
Over time, as the benefits of freer trade in capital, goods and services have been increasingly
recognized, countries including Canada have adjusted their tariff and tax structures to remove
impediments to international transactions. Part of this adjustment has been the reduction of nonresident withholding tax on certain payments.
Canada’s statutory non-resident withholding tax rate is 25 per cent. However, the rate is lowered
and exemptions are provided for certain payments through an extensive network of bilateral tax
treaties. These rate reductions, which apply on a reciprocal basis, differ depending on the type of
income and the tax treaty country.
The Income Tax Act also provides for a number of unilateral exemptions from withholding tax,
including exemptions for the following: interest payments on government debt; interest payments
to arm’s-length persons on long-term corporate debt; interest payments to arm’s-length persons
on foreign currency deposits with branches of Schedule I banks; and royalty payments for the use
of copyright.
Lower withholding taxes can reduce the cost to Canadian business of accessing capital and other
business inputs from abroad. For example, a lower Canadian withholding tax on interest
payments to non-residents can reduce the cost of accessing foreign capital in cases where foreign
creditors raise the interest rate charged to cover payment for withholding tax. Similarly, a reduced
withholding tax on royalty payments can reduce the cost of accessing foreign technology and
other property and services, and thereby enhance the competitiveness of Canadian businesses
requiring these inputs.
The estimates of the tax expenditures associated with withholding tax exemptions for certain royalties,
interest, dividends and management fees paid to non-residents were derived from a detailed
analysis of payments to non-residents and withholding tax collections on those payments for
1992, 1993 and 1994, and projections of payments to non-residents over the post-1994 period.
The cost estimates were derived by applying treaty withholding tax rates (in the case of payments
to a country with which Canada had a tax treaty in the year considered) or the statutory 25-percent withholding tax rate (in the case of payments to non-treaty countries) that would otherwise
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apply, in the absence of an exemption, to observed and projected payments data under the benchmark
assumption used throughout this publication of no behavioural response to the hypothetical
removal of existing withholding tax exemptions.
This benchmark assumption of no behavioural response is particularly difficult to sustain for this
type of tax. Foreign providers of capital, technology and other property and services, in most
cases, are unwilling to bear the withholding tax given that they do not pay such a tax when
supplying other markets. If a withholding tax was to be imposed, foreign providers would either
require that the tax be shifted back to the Canadian borrower or user of property or services in the
form of higher charges (which in many cases could not be absorbed), or they would bypass
Canada in favour of other foreign markets where such a tax does not exist, again implying
increased financing and other business costs to Canadians. Indeed, these same competitiveness
considerations have led to the introduction of a number of withholding tax exemptions both in
Canada and in other countries.
Thus, these particular tax expenditure estimates cannot be interpreted as additional revenues that
could be collected from non-residents if the withholding tax exemptions were removed, since the
removal of the exemptions would generally involve the elimination of the tax base.
Exemption from Canadian income tax of income
earned by non-residents from the operation of a ship
or aircraft in international traffic
Non-resident persons operating a ship in international traffic are exempted from Canadian income
tax as is done in other countries. Similarly, non-resident persons operating an airline in
international traffic are exempted from Canadian income tax. In both cases, the exemption applies
only if the non-resident’s home country gives Canadian residents substantially similar tax relief.
The amount of the tax expenditure is the tax that would otherwise be payable on profits related to
the Canadian business of the non-resident persons, net of the tax collected on the non-Canadian
income of the resident persons.
No data are available.
Other Tax Expenditures
Transfer of income tax room to provinces
in respect of shared programs
In 1967, federal-provincial fiscal arrangements were altered. The federal government substituted
a transfer of corporate income tax points for direct transfers to provinces under the cost-shared
program for post-secondary education. The tax change involved an increase in the corporate
income tax abatement rate from 9 to 10 percentage points, effectively reducing the federal
corporate income tax rate at that time from 37 per cent to 36 per cent (the rate before the
abatement was 46 per cent). This transfer of tax room has been included as a tax expenditure
because it is a substitute for direct spending programs.
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DESCRIPTION OF CORPORATE INCOME TAX PROVISIONS
Interest credited to life insurance policies
Life insurance companies are taxed under the investment income tax (IIT) at a rate of 15 per cent
on net investment earnings attributable to life insurance policies.
The IIT interacts with the taxation of policyholders. The Income Tax Act divides life insurance
policies into two categories: savings-oriented policies and protection-oriented policies.
Savings-oriented policies are those where the amount of money invested in the policy is large
relative to the death benefit. A holder of a savings-oriented policy is subject to annual accrual
taxation in respect of the net investment earnings credited to the policy. Net investment earnings
reported by these holders are subtracted from the IIT base in order to avoid double taxation of net
investment earnings.
In contrast, a holder of a protection-oriented policy is not subject to annual accrual taxation. Net
investment earnings are taxed when the policy is sold or surrendered, terminated (other than by
death), or when paid out as policy dividends once the cumulative dividends exceed the total
premiums paid under the policy. Net investment earnings that are taxable to holders of protectionoriented policies are also deductible from the IIT base.
Most of the cost of the tax expenditure relates to protection-oriented policies. This cost has
three basic elements:
n
differences between personal and IIT rates;
n
timing differences (i.e. policies that are eventually taxed in the hands of policyholders); and
n
permanent differences (i.e. policies that are held until the death of the insured).
Non-taxation of registered charities
and other non-profit organizations
Registered charities and other non-profit organizations, both incorporated and unincorporated, are
exempt from income tax. This is a tax preference to the extent that the charity or organization has
taxable income, mainly investment income or profits from certain commercial activities.
No data are available.
Income tax exemption for provincial and municipal corporations
Provincial Crown corporations and municipal corporations are exempt from income tax. Under
the benchmark tax structure, such corporations would be taxable to the extent that they had
taxable income.
No data are available.
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CHAPTER 5
Non-taxation of certain federal Crown corporations
While federal Crown corporations are generally not subject to income tax, those Crown
corporations that carry on significant commercial activities are taxable. It is possible,
however, that some exempt corporations have income that would be taxable under the benchmark
tax system.
No data are available.
Excise tax transportation rebate
The excise tax transportation rebate, introduced in 1991 and effective for the 1991 and 1992
calendar years, allowed transportation businesses to receive an excise tax rebate of 3 cents for
each litre of eligible fuel on which federal fuel excise tax of 4 cents per litre was paid. In
exchange, businesses that elected to receive this rebate were required to reduce their income tax
losses by 10 dollars for every 1 dollar rebated. This provided the industry with an immediate
cash-flow benefit at the cost of lower loss carry-forwards to offset income taxes in future years.
This rebate was applicable to purchases of diesel and aviation fuel subject to federal excise tax
during the 1991 and 1992 calendar years.
A simpler option was available for trucking businesses that could elect to receive a rebate of
12 cents per litre up to a maximum of $500 per taxpayer in lieu of the 3-cent-per-litre rebate.
Aviation fuel excise tax rebate
The aviation fuel excise tax rebate, which is effective for the calendar years 1997 to 2000
inclusive, provides excise tax rebates on the aviation fuel used by airline companies. Rebates are
limited to $20 million per year per associated group of companies. In order to receive a rebate, a
company must agree to reduce its income tax losses by 10 dollars for every 1 dollar of rebate.
Surtax on the profits of tobacco manufacturers
Tobacco manufacturers are subject to a special surtax on their profits. The surtax is levied at a rate
of 40 per cent of the Part I tax on tobacco manufacturing profits. The surtax was originally
announced as part of the National Action Plan to Combat Smuggling in February 1994. In
November 1996, the government announced that the surtax would be extended for an additional
three years to February 2000.
The surtax is considered a tax expenditure because it constitutes a departure from the benchmark
system. Because the surtax results in more revenues than would otherwise be raised under the
benchmark tax system, it is a negative tax expenditure.
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DESCRIPTION OF CORPORATE INCOME TAX PROVISIONS
Temporary tax on the capital of large deposit-taking institutions
The temporary surcharge is levied at a rate of 12 per cent of the financial institution capital tax
imposed under Part VI of the Income Tax Act calculated before any credit for income taxes and as
if there was a capital deduction of $400 million. The surcharge applies to financial institutions as
defined under Part VI, but not to life insurance companies. The surcharge is not eligible to be
offset by tax payable under Part I.
The surcharge was introduced in the 1995 budget for a period of 18 months and extended for one
year in the 1996, 1997, and 1998 budgets. The 1999 budget proposes to extend the surcharge for
another year to October 31, 2000.
The surcharge is considered a tax expenditure because it constitutes a departure from the
benchmark system. Because the surcharge results in more revenues than would otherwise be
raised under the benchmark tax system, it represents a negative tax expenditure.
Memorandum Items
Refundable Part I tax on investment income
of private corporations
This and the following item are parts of the tax system that provide some integration between the
personal and corporate tax systems. The estimates provided reflect the portion of corporate taxes
collected that are refundable. If corporations and individuals were treated as separate tax units,
these amounts would not be refundable.
A portion of the income taxes paid on investment income received by a private corporation
(excluding deductible intercorporate dividends) is refunded to a Canadian-controlled private
corporation (CCPC) when this income is paid out to shareholders as dividends.
Prior to July 1, 1995, a corporation’s refundable tax equalled approximately 20 percentage points
of the Part I tax paid on its investment income. To further ensure the integration of corporate and
individual income taxes, an additional refundable tax of 6b per cent is levied on the investment
income received after June 30, 1995 by a CCPC. This additional tax is refunded to a private
corporation, along with refundable Part I tax, when the investment income is paid to shareholders
as dividends. Corporations receive a refund from their refundable tax account at a rate of one
dollar for every three dollars of taxable dividends paid.
Refundable capital gains for investment corporations
and mutual fund corporations
Capital gains realized by an investment corporation and a mutual fund corporation are taxed at
the corporation level, and the tax is accumulated in the “refundable capital gains tax on hand”
account. The corporation uses this account to claim a capital gains refund when it distributes
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CHAPTER 5
capital gains dividends to its shareholders or through share redemptions by a mutual fund
corporation. Since these dividends are capital gains distributions, they are taxed as capital gains in
the hands of the shareholder and not as dividends.
This measure is considered a tax expenditure because it constitutes a departure from the
benchmark system by allowing a public corporation (that qualifies as an investment corporation
or a mutual fund corporation) to flow out its capital gains to shareholders. The result is that
the distributed capital gains will be taxed at the same rate as if the corporation were a
private corporation.
Loss carry-overs
The cyclical nature of business and investment income suggests that the impact of such income
should be viewed over a longer period of time rather than on an annual basis. As a result, carryovers of losses are treated as part of the benchmark tax system. The loss carry-over rules permit
taxpayers to apply their losses against past or future income. The estimates provided indicate
approximately how much tax revenue the government forgoes by allowing current-year losses to
be carried back (i.e. applied to reduce tax paid in previous years) and by allowing losses of
previous years to be carried forward and applied to reduce tax otherwise payable for the current
year. There are four types of losses that can be carried over, and specific provisions apply to each.
Non-capital losses
A non-capital loss is a company’s loss from business operations. Non-capital losses may be
carried back three years and forward seven years to reduce or offset the corporation’s
taxable income.
Estimates reflecting the impact of the carry-forward of prior years’ losses include the revenue
impact of allowing non-capital losses of previous years to be applied to reduce Part I tax and the
refundable Part IV tax otherwise payable for the current year. Estimates reflecting the impact of
allowing current-year losses to be carried back (i.e. applied to reduce income tax paid in previous
years) include the impact of allowing current-year losses to be carried back to reduce both
Part I tax and refundable Part IV tax.
Net capital losses
A net capital loss can arise from the disposition of capital property. This type of loss may be
carried back three years and forward indefinitely but can only be applied against net taxable
capital gains.
Estimates include the revenue impact of allowing net capital losses of previous years to be
applied to reduce income tax otherwise payable for the current year and the impact of allowing
current-year net capital losses to be carried back (i.e. applied to reduce income tax paid in
previous years).
104
DESCRIPTION OF CORPORATE INCOME TAX PROVISIONS
Farm losses and restricted farm losses
A corporation can deduct, in the calculation of net income, a loss incurred from a farming or
fishing business. The unused losses of this business may be carried back 3 years and forward
10 years.
When the corporation’s major source of income is not farming, the amount of farming losses
deductible in the year is restricted to a maximum of $8,750. The unused losses, defined as the
excess of the net farm losses over the farm losses deductible in the year, are considered restricted
farm losses. Restricted farm losses may also be carried back 3 years and forward 10 years but can
only be applied against farm income.
Estimates consist primarily of the revenue impact of allowing farming losses of previous years
to be applied to reduce income tax otherwise payable for the current year.
The revenue impact of applying restricted farm losses is minimal.
Deductible meals and entertainment expenses
Meals and entertainment expenses are considered to be a memorandum item because the amount
that should be deductible under a benchmark tax system is debatable. While a portion of these
expenditures is incurred in order to earn income, there is an element of personal consumption
associated with these expenditures. Consequently, only a partial deduction for these expenses
would be permitted under the benchmark tax system.
The deduction is limited to 50 per cent of the cost of food, beverages and entertainment
(80 per cent before March 1, 1994) in order to reflect the personal consumption portion of
these costs. To the extent that the business-related portion (i.e. the amount deductible under
the benchmark system) exceeds the 50-per-cent deductible portion (80 per cent before
March 1, 1994) there would be a negative tax expenditure since too large a portion of the costs is
denied. Conversely, if the business-related portion were less than the tax deductible portion, there
would be a positive tax expenditure. The estimates provided reflect the additional tax revenue that
would be received if no deduction were allowed (i.e. that there is no business purpose to
the expenditure).
Large corporations tax
The large corporations tax (LCT) was introduced on July 1, 1989 as a tax on the Canadian capital
of large corporations. The rate of tax in 1993 and 1994 was 0.2 per cent. The 1995 budget
increased the LCT rate to 0.225 per cent effective budget day 1995.
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CHAPTER 5
This tax ensures that all large corporations, and groups of related corporations, with more than
$10 million of taxable capital employed in Canada pay some federal tax. Companies can reduce
their LCT liability to the extent of the Canadian portion of their corporate surtax. The rate of
corporate surtax was increased from 3 per cent to 4 per cent in the 1995 budget.
Threshold
The $10-million capital deduction effectively exempts smaller corporations from the LCT as long
as these corporations are not related to other corporations subject to the LCT – that is, the
$10-million deduction must be shared among related corporations. This capital deduction is not
considered to be a tax expenditure because it is generally available to all corporations.
Exempt corporations
Certain corporations such as non-resident investment corporations, deposit insurance corporations
and corporations exempt from paying Part I income tax are exempt from paying the LCT. This
exemption is a tax expenditure, but data are not available to estimate its value.
Patronage dividend deduction
In computing income for a taxation year, a taxpayer is allowed to deduct patronage dividend
payments made to customers. Patronage dividends are payments made to customers in proportion
to their volume of business. The taxpayer is required to withhold 15 per cent of all patronage
dividends in excess of $100 paid to each customer who is resident in Canada.
The appropriate benchmark tax treatment of patronage dividends is uncertain. These dividends
could be considered to be analogous to the payment of a volume discount or the return of excess
payments. With this view of the benchmark system, this would not be a tax expenditure.
Alternatively, these payments could be perceived as the distribution to members (or shareholders)
of earnings which would not be deductible under the benchmark system. The amount shown,
reflecting this view of the benchmark system, is the revenue impact of allowing patronage
dividends to be deductible from income.
Logging tax credit
The logging tax credit reduces federal taxes payable by the lesser of two-thirds of any logging tax
paid to a province and 6b per cent of income from logging operations in that province. This
reduction in federal taxes can be argued to be a tax expenditure for the same reasons explained
under the analysis of the resource allowance deduction.
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DESCRIPTION OF CORPORATE INCOME TAX PROVISIONS
Deductibility of provincial royalties (joint venture payments)
for the Syncrude project (remission order)
Taxpaying participants in the Syncrude project are permitted to deduct both the resource
allowance and “joint venture payments” made to the province of Alberta in lieu of a royalty in
computing income subject to tax. This is accomplished through a remission order. Under the
benchmark tax system, these joint venture payments, which are profit sensitive, would not be
deductible. The estimate of the tax expenditure is calculated as the value provided by this extra
deduction less the reduction in the resource allowance.
Deductibility of royalties paid to Indian bands
Royalties and lease rentals paid to Indian bands in respect of oil and gas and mining activities on
Indian reservations are considered to be Crown charges paid to Her Majesty in Right of Canada
or of a province in trust to the Indian band. Unlike non-deductible Crown charges, amounts paid
to the benefit of an Indian band are generally deductible for federal income tax purposes. In
addition to the deductible Crown charges, a resource allowance is earned on the resource profits
net of the deductible Crown charges.
The amounts paid to the Government of Canada in the form of mining and oil and gas
royalties/lease rentals paid to Indian bands are provided below:
Oil and gas and mining royalties/lease rentals paid to Indian bands
1993-94
1994-95
1995-96
1996-97
1997-98
($ millions)
Oil and gas
Mining
59.0
76.0
58.0
92.0
89.0
0.6
0.7
0.5
1.0
2.0
Source: Department of Indian Affairs and Northern Development.
Non-resident-owned investment corporation refund
A non-resident-owned investment corporation must pay income tax at a rate of 25 per cent.
However, except for capital gains realized on taxable Canadian property, this tax is refundable
when the surplus is distributed as taxable dividends to the shareholders, and the applicable rate of
withholding tax then applies. The refund is designed to relieve the dividends paid to non-residents
from double taxation that would otherwise result. The corporation is essentially treated as a
conduit for the flow-through of income. The amounts reported estimate the tax revenues that
would be generated if the non-resident-owned investment corporation refund was not available.
Investment corporation deduction
Investment income is taxed at the corporation level and in the hands of the individual who
receives it as dividend payments. In order to achieve a certain degree of integration between the
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CHAPTER 5
personal and corporate tax systems, the current rules allow an investment corporation to deduct
from its Part I tax otherwise payable 20 per cent of the amount by which its taxable income
exceeds its taxed capital gains.
This measure constitutes a tax expenditure because it allows a public corporation that qualifies as
an investment corporation to benefit from elements of the integration system which are usually
available only to private corporations. The tax expenditure is estimated as the additional revenue
that would have been collected by the government if investment income (except capital gains)
had been taxed at the general income tax rate applicable to public corporations.
Deferral of capital gains income
through various rollover provisions
The taxation of capital gains is affected by provisions that permit taxpayers to defer realization
for tax purposes through various rollover provisions. Since the benchmark tax structure includes
all accrued gains, this item is identified separately for information purposes. Examples include:
n
the transfer of assets to a corporation or partnership in consideration for share capital or a
partnership interest;
n
amalgamations of taxable Canadian corporations;
n
the winding-up of a subsidiary corporation into its parent corporation; and
n
share-for-share exchanges.
The 1994 budget made changes that curtail the use of various rollover provisions in certain
reorganizations.
No data are available.
Deduction for intangible assets
Three-quarters of eligible capital expenditures on intangible assets are added to the cumulative
eligible capital of a taxpayer. A deduction of up to 7 per cent of cumulative eligible capital at
the end of the year is allowed. Examples of intangible assets include goodwill, customer lists
and franchises.
The deduction for intangible assets could give rise to positive or negative tax expenditure
estimates depending on the actual rate of depreciation of these assets relative to the amount that
is permitted for tax purposes.
No data are available.
108
DESCRIPTION OF CORPORATE INCOME TAX PROVISIONS
Tax exemption on income of foreign affiliates
of Canadian corporations
The Canadian system for taxing the income of foreign affiliates of Canadian shareholders or the
dividend income of the Canadian shareholders derived from foreign affiliates is based on the
objectives of encouraging international competitiveness, protecting the tax base and eliminating
double taxation.
Where the foreign affiliate earns active business income, Canada defers any recognition of that
income until it is paid to the Canadian shareholders as a dividend on shares of the affiliate. In
cases where the business income has been earned in a country with which Canada has a double
taxation treaty, the dividend paid out of that income to Canadian corporate shareholders is not
subject to additional Canadian tax. Where the business income is earned in non-treaty countries,
the dividend is taxed in Canada but a tax deduction is provided to Canadian corporate
shareholders based on the underlying foreign tax paid.
Where the foreign affiliate earns passive income and the affiliate is a controlled foreign affiliate
of a person resident in Canada, the passive income is taxed in the Canadian shareholder’s hands
on an accrual basis. The Canadian shareholder can deduct taxes paid in the foreign jurisdiction in
determining net additional Canadian tax liability. When the income earned in the foreign affiliate
is actually paid to the shareholder in the form of a dividend, a deduction from income subject to
tax is provided to the extent that the income was included in income subject to tax in a
previous year.
Questions arise as to what should be the appropriate benchmark system to measure the value
of the tax expenditure, if any, in this case. Basically, three different benchmarks could
be contemplated:
n
Canada should tax only Canadian-source income.
This is the territorial approach. Under this approach, foreign subsidiaries of Canadian
companies would face the same tax burden on foreign-sourced business income as locally
owned enterprises in the foreign jurisdiction. This approach is consistent with the concept
of capital-import neutrality. Capital-import neutrality results when the shareholders of
subsidiaries do not face additional taxes in Canada with respect to the foreign business
income earned by their subsidiaries. This is the effect of Canada’s decision not to tax
dividends arising from affiliates in countries with which Canada has entered into a double
taxation agreement as a way to relieve double taxation. If this exempt dividend approach
were to be considered as the benchmark, then no preference would be associated with the
foreign dividend exemption.
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CHAPTER 5
n
Income earned by a foreign affiliate should be taxable in Canada when dividends
are paid to the Canadian shareholder and double taxation alleviated with a
foreign tax credit.
This is the approach used by a number of countries since it allows for additional taxes to
be collected in the country of residence of the shareholder of a foreign affiliate at the
time a dividend is paid to the shareholder by the affiliate out of foreign business income.
These additional taxes would be levied when domestic tax payable exceeds the amount of
foreign taxes paid both on the dividend itself and on the underlying foreign corporate profits
out of which the dividend was paid. In Canada, dividends from foreign affiliates that do not
qualify as exempt dividends are taxed on this basis. If this were to be considered the
benchmark system, then the exempt dividend system would provide a preference measured as
the additional tax, net of the foreign tax credit, that would have been payable had the
dividend been taxable in Canada.
n
Income earned by foreign affiliates should be taxable in Canada as it accrues
to the Canadian shareholder (i.e. on a current basis).
This system is consistent with the concept of capital-export neutrality, which states that
income of foreign affiliates should be subject to the same tax in the hands of its shareholders
on a current basis regardless of whether the income is earned domestically or in a foreign
affiliate. Certain passive income earned by controlled foreign affiliates is taxable on this basis
in Canada. If this system was to be viewed as the benchmark, both the exempt dividend and
the foreign tax credit approaches would be said to provide a preference measured as the
deferral of incremental Canadian tax from the time the income is earned until the time the
dividend is paid out.
Each of these three possible benchmarks has a policy justification. Data required to compute the
amount of tax preference associated with any of the benchmarks are currently unavailable.
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Chapter 6
DESCRIPTION OF THE GOODS AND
SERVICES TAX PROVISIONS
Since the goods and services tax (GST) is levied at all points in the production and distribution
chain, the value-added nature of the tax makes it equivalent to a retail sales tax levied on the sale
of goods and services to the final consumer. Based on this equivalency, the GST base can be
estimated from a Sales Tax Model constructed using data obtained from Statistics Canada’s
input-output tables and the National Income and Expenditure Accounts.
The data from the input-output tables are used to derive detailed expenditures by commodity for
households, public sector bodies and exempt businesses. The personal expenditure categories of
the input-output tables, along with the investment categories for residential construction and real
estate commissions, are used to derive commodity expenditures for households. The commodity
expenditures of public sector bodies are derived from certain personal expenditure categories, current
government expenditure categories and appropriate investment categories contained in the inputoutput tables. (Public sector bodies include the federal government, provincial governments,
municipalities, universities, school boards, public colleges, hospitals, charities and non-profit
organizations.) The commodity expenditures of exempt businesses are derived from the input
matrix of the input-output tables.
The commodity data described above are used to identify the impact of the GST provisions that
either zero-rate or exempt certain goods and services. In some cases, modifications had to be
made to the data derived from the input-output tables and the National Income and Expenditure
Accounts to account for the structure of the GST. Since final input-output tables for a given year
are available only four years after the fact, National Income and Expenditure Accounts data are used to
project the impact of each GST provision to the relevant historical year. Expenditure data contained
in the Department of Finance’s Canadian Economic and Fiscal Model (CEFM) are used to project
the impact of most of the GST provisions over the forecast period.
The Sales Tax Model is not the sole source of the estimated tax expenditures associated with the
GST. In some cases, actual data from Revenue Canada were used for the tax expenditure
estimates. In other cases, estimates were derived from entirely different sources. This chapter
describes the various GST expenditure estimates and how they were derived.
Zero-Rated Goods and Services
Basic groceries
Basic groceries, which include the majority of foodstuffs for preparation and consumption at
home, are zero-rated under the GST. However, the tax is charged on certain goods such as soft
drinks, candies and confections, and alcoholic beverages.
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CHAPTER 6
The cost of the tax expenditure can be estimated using the Sales Tax Model by identifying
commodities purchased by final consumers and public sector bodies which are currently not
subject to tax. The majority of these purchases are contained in Statistics Canada’s personal
expenditure category “Food and Non-Alcoholic Beverages.”
Prescription drugs
Drugs that are controlled substances for which a prescription is required are zero-rated. This
provision also includes other drugs that have been prescribed by a recognized health care
practitioner. The associated dispensing fee is also zero-rated. However, this provision excludes
those items labelled or supplied for veterinary use.
The estimate is derived using the Sales Tax Model. However, an adjustment is made to reflect the
fact that the input-output commodity “Pharmaceuticals” includes both prescription and nonprescription medicine. The ratio used to separate these two categories of medicine is based on
information provided by Statistics Canada.
Medical devices
A wide range of medical devices are zero-rated under the GST. This includes canes; crutches;
wheelchairs; medical and surgical prostheses; ileostomy and colostomy devices; artificial
breathing apparatus; hearing and speaking aids; prescription eyeglasses and contact lenses;
various diabetic supplies; and selected devices for the blind and for the hearing or speech
impaired. In some instances, a device qualifies for tax-free status only if prescribed by a
recognized health care practitioner.
The estimate is obtained using the Sales Tax Model. The zero-rated medical devices are found in
the input-output commodities “Personal Medical Goods,” “Medical and Dental Equipment and
Supplies,” and “Ophthalmic Goods.” An adjustment is made to reflect the fact that the inputoutput commodities “Personal Medical Goods” and “Ophthalmic Goods” include expenditures
made by final consumers which are not zero-rated under the medical devices provision. The ratio
used to separate the zero-rated from the non-zero-rated expenditures is based on information
provided by Statistics Canada.
Agricultural and fish products and purchases
Instead of taxing sales and providing input tax credits at early stages in the food productiondistribution chain, certain agricultural and fish products are zero-rated all through the chain.
A prescribed list of such supplies includes farm livestock, poultry, bees, grains and seeds for
planting or feed, hops, barley, flax seed, straw, sugar cane or beets, etc. In addition, prescribed
sales and purchases of major types of agricultural and fishing equipment are zero-rated.
The main effect of this provision is on the cash-flow position of taxpayers. For example, in the
normal operation of the GST, farmers would pay the GST on taxable purchases and would claim
a corresponding input tax credit at the end of their tax period. However, in the case of prescribed
112
DESCRIPTION OF THE GOODS AND SERVICES TAX PROVISIONS
zero-rated supplies, the farmer does not pay the GST and so does not have to wait to claim an
input tax credit. Consequently, the cash-flow position of the farmer is improved. At the same
time, however, the suppliers lose the benefit of holding the GST on these purchases until the end
of their tax period. Since the aggregate tax liability of these taxpayers remains unchanged, the
revenue implications of this measure are small.
Certain zero-rated purchases made by exporters
Certain supplies of goods and services delivered in Canada but subsequently exported are zerorated. These include:
n
the supply of goods to a recipient who intends to export them, provided they are not excisable
goods (spirits, beer or tobacco) and the goods are not further processed or modified in Canada
by the recipient;
n
the supply of excisable goods to a recipient who, in turn, exports the goods in bond;
n
supplies of natural gas made to a person who is exporting the gas by pipeline and not further
processing or using the gas in Canada before its exportation other than as fuel or compressor
gas to transport the gas; and
n
goods sold to duty-free shops licensed as such under the Customs Act.
As with agricultural and fish products, this provision has only cash-flow implications. Again,
the impact of this measure on tax revenues is small.
Non-taxable importations
Certain importations are tax-free under the GST. These importations include:
n
goods, other than books and periodicals, valued at not more than $20 and mailed to residents
of Canada from other countries;
n
duty-free personal importations such as goods valued at not more than $500 and imported by
Canadians who have been outside the country for more than seven days (the limit was $300
prior to June 13, 1995); and
n
goods imported by foreign diplomats.
No data are available.
Zero-rated financial services
Financial services provided to non-residents are generally zero-rated. However, there are certain
exceptions (e.g. financial services that relate to debt arising from deposits in Canada, real
property situated in Canada, goods purchased for use primarily in Canada, services performed
primarily in Canada).
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The zero-rating provisions enable Canadian financial institutions that generate
significant amounts of revenue through international activities to remain competitive in
global markets.
Tax-Exempt Goods and Services
Residential and other personal-use real property
Certain real property transactions are exempt under the GST. These include sales of used
residential property, sales of personal-use real property by an individual or a personal trust, and
the sale of farmland to a family member who is acquiring the property for personal use.
Rentals of a residential complex (such as a house) or a residential unit (such as an apartment) for
a period of at least a month are tax exempt. Short-term accommodation is also exempt where the
charge for the accommodation is not more than $20 per day.
The estimate is derived using the Sales Tax Model based on the GST being applied to the inputoutput commodity “cash rent,” and incorporates the loss of the GST currently paid on business
inputs purchased by the landlord. In addition, the estimate captures the GST being applied to
certain consumer expenditures on the commodity “other rent” which represents exempt purchases
of parking privileges associated with rental accommodation.
Health care services
Health care services are exempt under the GST. These services include the following categories:
n
institutional health care services provided in a health care facility. These include
accommodation, meals provided with accommodation, and rentals of medical equipment to
patients or residents of the facility. However, it excludes meals served in a cafeteria, parking
charges, or haircuts for which a separate fee is charged;
n
services provided by certain health care practitioners whose profession is regulated by the
governments of at least five provinces. This category includes nursing, dental, optometric,
chiropractic, physiotherapy, occupational therapy, speech therapy, chiropodic, podiatric,
osteopathic, audiological and psychological services; and
n
services covered by a provincial health insurance plan. Most of these services are already
covered by the previous two provisions.
All exempt services that are covered by provincial health insurance plans are included in the
benchmark because, under the Constitution, the GST does not apply to purchases made by
provincial governments. Thus, the only cost from this provision involves health services
purchased by final consumers. The estimates for this provision are derived from the Sales
Tax Model.
114
DESCRIPTION OF THE GOODS AND SERVICES TAX PROVISIONS
Education services (tuition)
The GST provides an exemption for most educational services. The exemption includes tuition
fees paid for courses provided primarily for elementary or secondary school students; courses
leading to credits towards a diploma or degree awarded by a recognized school authority,
university or college; and certain other types of training for a trade or vocation. In addition, the
exemption covers meals supplied to elementary or secondary students as well as most meal plans
at a university or public college.
The estimate is derived from the revenues that would be collected if tuition fees were taxed and
input tax credits were allowed for taxable purchases. The estimate takes into account the fact that
universities and public colleges currently receive a rebate of 67 per cent of the tax that they pay on
their purchases.
The estimate is derived from the Sales Tax Model based on the input-output commodity
“Education Services” augmented by data contained in Statistics Canada’s
Education Quarterly Review.
Child care and personal services
Certain child and personal care services are exempt under the GST. The exemption covers
the following:
n
child care services provided for periods of less than 24 hours to children under 14 years of
age; and
n
certain personal care services including supplies of care and supervision to residents of an
institution, as well as accommodation where it is provided for children or disabled or
underprivileged persons.
The estimate is derived using the Sales Tax Model based on the input-output commodity
“Personal Services, including Child Care” contained in the final demand category “Domestic and
Child Care Services.” The estimate reported here does not account for day care that might be paid
by governments, or day care provided by a non-profit organization. However, the impact of these
exclusions on the overall estimate is unclear since provincial expenditures would not be subject to
tax and the remaining expenditures would be eligible for partial rebates if taxed.
Legal aid services
Legal services provided under a provincially authorized legal aid program are exempt under the
GST. This includes payments by the client in respect of the legal aid services and payments by a
legal aid society to a private lawyer for legal services.
There are two ways in which the tax is relieved:
n
legal aid services delivered directly by the Crown or a Crown agency (as is the case in
Nova Scotia, Newfoundland, Prince Edward Island, Quebec, Manitoba and Saskatchewan)
are exempt; and
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CHAPTER 6
n
legal aid services provided by private practitioners to a legal aid plan administrator are
taxable. However, the person responsible for the legal aid plan is entitled to a rebate of
100 per cent of any tax paid on the supply.
Revenue Canada supplied the data related to the rebates provided to legal aid plans in the
provinces of New Brunswick, Ontario, Alberta and British Columbia. To account for the other
provinces where the service is explicitly exempt, provincial economic accounts data are used.
Specifically, it is assumed that the value of legal aid services relative to the total expenditures
contained in the provincial economic account category “Personal Business” in the tax-exempt
provinces would be the same as in those provinces where a rebate is provided.
The projected expenditure estimate is based on the growth in consumption obtained from
the CEFM.
Ferry, road and bridge tolls
International ferry services are treated as zero-rated like other international transportation
services. Other ferry, road and bridge tolls are GST exempt.
The estimate is derived using the Sales Tax Model based on the expenditures of final consumers
on the commodity “Highway and Bridge Maintenance.”
Municipal transit
A municipal transit service is defined as a public passenger transportation service provided by a
transit authority whose services are at least 90 per cent within a particular municipality and its
surrounding areas. These municipal transit services are exempt under the GST.
The estimate is derived using the Sales Tax Model.
Exemption for small businesses
Businesses or individuals with annual revenues of $30,000 or less from taxable and zero-rated
transactions may elect to be exempt under the GST. Such firms would not have to charge tax on
their sales and would not be able to claim input tax credits on their business purchases.
The starting point in deriving the estimate is gross sales data for 1990 obtained from personal and
corporate income tax information. From this data, one can estimate that the total sales from firms
with annual sales of less than $30,000 accounts for approximately 0.5 per cent of all sales in the
Canadian economy. This ratio can then be applied to the total gross GST collections to
approximate the revenues that would arise from eliminating the small business threshold.
The projected expenditure estimate is based on the growth in nominal gross domestic
product (GDP) obtained from the CEFM.
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DESCRIPTION OF THE GOODS AND SERVICES TAX PROVISIONS
Quick method accounting
Small businesses registered under the GST are eligible to elect to account for GST using quick
method accounting. Under the scheme, businesses do not have to keep track of the tax paid on
most of their inputs. Instead, these firms remit a prescribed percentage of the GST that they
collect on their sales. The remaining GST collected is kept by the firm in lieu of the
unaccounted input tax credits. The firm is eligible to claim an input tax credit for the tax paid
on capital goods.
The estimate is derived from micro-statistical data for 1991 supplied by Statistics Canada. The
take-up rate of this provision for eligible small businesses is about 22 per cent. The estimate for
subsequent historical years is derived by projecting the 1991 estimate based on information from
Revenue Canada regarding the growth in total input tax credits claimed.
The projected expenditure estimate is based on the growth in nominal GDP obtained from
the CEFM.
Water and basic garbage collection services
Water and basic garbage collection services are exempt under the GST. Charges levied for water
and basic garbage collection services are captured in the commodity “Water, Waste Disposal and
Other Utilities” contained in the input-output tables. The estimate is derived from the Sales
Tax Model.
Domestic financial services
Financial services are defined as including services relating to financial intermediation, market
intermediation and risk pooling. However, in many cases, the price of a financial service is
implicit. For example, when banks provide lending and deposit-taking services, the banks’ fees
for these services are the spread between interest rates received from borrowers and the interest
paid to depositors. The exact price associated with each financial transaction is difficult to
determine and, therefore, it is difficult to apply the GST to the sale of the service. As a result,
most financial services provided to residents of Canada are exempt under the GST.
Members of a “closely related group” (if there is at least 90-per-cent cross-ownership of voting
shares between them) where one of the members is a “listed financial institution” could jointly
elect to treat most supplies between them as tax-exempt financial services. The purpose of this
election is to recognize that a closely related corporate group can be viewed as a single entity
with respect to intragroup transactions.
No data are available.
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Certain supplies made by non-profit organizations
Supplies that are GST-exempt when made by non-profit organizations include recreational
services provided primarily to children age 14 and under and individuals who are underprivileged
or have a disability; supplies of food, beverages and lodging to relieve poverty or distress; and
certain amateur performances.
No data are available.
Tax Rebates
Rebates for book purchases made by qualifying institutions
On October 23, 1996, the Minister of Finance announced that a 100-per-cent GST rebate would
be provided on all book purchases made by public libraries, schools, universities, public colleges,
municipalities, public hospitals, and qualifying charities and non-profit organizations.
The initial expenditure estimate for 1997 is the estimated annual cost of implementing this
provision. The projected expenditure estimate is based on appropriate expenditure data obtained
from the CEFM.
Housing rebates
Purchasers of newly constructed residential dwellings and substantially renovated houses are eligible
for a rebate of the GST paid if the purchaser is acquiring the dwelling as a primary place of
residence. For houses priced at or below $350,000, the rebate is 36 per cent of the total GST paid
to a maximum of $8,750. The rebate is phased out for houses priced between $350,000
and $450,000.
The estimate for historical years is obtained from Statistics Canada’s National Income and
Expenditure Accounts. The projected expenditure estimate is based on the growth in investment
in new residential construction obtained from the CEFM.
Rebates for foreign visitors on accommodation
Non-residents visiting Canada are entitled to a rebate for the GST paid on most goods and shortterm accommodation. Specifically, the rebate covers the following where the tax paid is at
least $20:
n
goods for use primarily outside Canada, excluding excisable goods such as alcoholic
beverages and tobacco products, provided the goods are exported within 60 days of
purchase; and
n
the tax paid on short-term lodging, but not including meals, where the period of stay is less
than one month.
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DESCRIPTION OF THE GOODS AND SERVICES TAX PROVISIONS
However, goods for use outside Canada are essentially the same as other exported goods and
should be considered as part of the benchmark. Thus, the cost of this provision is only the rebate
associated with short-term accommodation.
Revenue Canada has some administrative data related to rebates paid on short-term
accommodation to foreign visitors. However, this data only partially captures the provision’s
associated tax expenditure, since it is not possible to identify the value of rebates that are
conferred to travel operators and which are included in the business’s input tax credit. The
estimate of the tax expenditure for short-term accommodation is based upon Revenue Canada
administrative data, supplemented with additional data on foreign visitors provided by
Statistics Canada.
Rebates for municipalities
Recognized municipalities are entitled to a rebate of 57.14 per cent of the GST paid on their
purchases used in the course of supplying exempt municipal services.
The estimate for historical years is based on data from Revenue Canada. Since the value of the
tax expenditure is influenced by provincial budgetary decisions, the projected value of the tax
expenditure for the relevant years is simply the value estimated for 1997.
Rebates for hospitals
Public hospitals are eligible for a rebate of 83 per cent of the GST paid on purchases related to
their supply of exempt services.
The estimate for historical years is based on data from Revenue Canada. Since the value of the
tax expenditure is influenced by provincial budgetary decisions, the projected value of the tax
expenditure for the relevant years is simply the value estimated for 1997.
Rebates for schools
Elementary and secondary schools operating on a not-for-profit basis are eligible for a rebate of
68 per cent of the GST paid on purchases related to their supply of exempt services.
The estimate for historical years is based on data from Revenue Canada. Since the value of the
tax expenditure is influenced by provincial budgetary decisions, the projected value of the tax
expenditure for the relevant years is simply the value estimated for 1997.
Rebates for universities
Recognized degree-granting universities operating on a not-for-profit basis are eligible for a
rebate of 67 per cent of the GST paid on purchases related to their supply of exempt services.
The estimate for historical years is based on data from Revenue Canada. Since the value of the
tax expenditure is influenced by provincial budgetary decisions, the projected value of the tax
expenditure for the relevant years is simply the value estimated for 1997.
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CHAPTER 6
Rebates for colleges
Public colleges which are funded by a government or municipality and whose primary purpose is
to provide vocational, technical or general education are eligible for a rebate of 67 per cent of the
GST paid on purchases related to their supply of exempt services.
The estimate for historical years is based on data from Revenue Canada. Since the value of the
tax expenditure is influenced by provincial budgetary decisions, the projected value of the tax
expenditure for the relevant years is simply the value estimated for 1997.
Rebates for charities
Charities registered under the Income Tax Act are eligible for a rebate of 50 per cent of the GST paid
on purchases related to their supply of exempt services.
The estimate for historical years is based on data from Revenue Canada. Since the expenditures
of charities are captured in Statistics Canada’s definition of personal expenditures, the projected
estimate is based on the growth in consumer expenditures obtained from the CEFM.
Rebates for non-profit organizations
The organizations eligible for this rebate are government-funded non-profit organizations. They
include registered amateur athletic associations and organizations operating a facility or part
thereof to provide nursing home intermediate care or residential care that receive at least
40 per cent of their funding from governments, municipalities or Indian bands. These
organizations are eligible for a rebate of 50 per cent of the GST paid on purchases related to their
supply of exempt services.
The estimate for historical years is based on data from Revenue Canada. Since the expenditures
of non-profit organizations are captured in Statistics Canada’s definition of personal expenditures,
the projected estimate is based on the growth in consumer expenditures obtained from the CEFM.
Tax Credits
Special credit for certified institutions
A special credit was provided in the period from January 1, 1991 to the end of 1995 to certified
institutions that employed mentally or physically disabled individuals in the manufacturing of
goods. These institutions were treated in the same manner as other businesses under the GST.
However, they received a special credit calculated on the basis of 100 per cent of the GST
collected from sales of manufactured goods in 1991, 75 per cent in 1992, 50 per cent in 1993 and
25 per cent in both 1994 and 1995.
No data are available.
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DESCRIPTION OF THE GOODS AND SERVICES TAX PROVISIONS
The GST credit
When the GST was introduced, a GST credit was established to ensure that families with annual
incomes below $30,000 would be better off under the new sales tax regime. The amount of the
GST credit depends upon family size and income. Currently, the basic adult credit is $199.
Families with children 18 years and younger receive a basic child credit of $105 for each child.
However, single parents can claim a full adult credit of $199 for one dependent child. In addition
to their basic credit, single adults (including single parents) are eligible for an additional credit of
up to $105. The value of the credit is reduced for families with incomes of over $25,921. Both the
credit amounts and the income threshold are adjusted annually to increases in the consumer price
index in excess of 3 per cent.
The estimate for historical years is based on data from Revenue Canada. The projected
expenditure estimate is obtained from the Department of Finance’s fiscal forecast.
Memorandum Items
Meals and entertainment expenses
In the normal operation of the GST, registrants are allowed to claim full input tax credits for the
tax paid on their purchases. However, in the case of the tax paid on meals, beverages and
entertainment expenses, the registrant is allowed to recover only 50 per cent of the GST paid as
an input tax credit. (Prior to February 1994, the input tax credit for business meals and expenses
was 80 per cent.) There is no input tax credit allowed for the GST paid on membership fees or dues in
any club whose main purpose is to provide dining, recreational or sporting facilities.
The estimate is based on the cost of the meals and entertainment tax expenditures contained in the
personal and corporate income tax expenditure tables. These figures are first grossed up to arrive
at the total meals and entertainment expenses in the entire economy using the marginal federal
income tax rates by sector. Then, 15 per cent is removed to account for expenses incurred in
GST-exempt activities since they are ineligible for any input tax credits. The cost of this
provision is equal to the above net expenses multiplied by 7 per cent.
Rebates to employees and partners
A rebate is available to certain employees of a GST registrant for the GST paid on those expenses
that are deductible in computing the employee’s income from employment for income tax purposes.
For example, an employee is allowed to claim a rebate equal to 7/107ths of the capital cost allowance
on an automobile, aircraft or musical instrument that is used in his or her employment and on
which GST is payable. Also, the GST rebate is available to an individual who is a member of a
GST-registered partnership in respect of expenses incurred outside the partnership that are
deducted in computing the member’s income from the partnership for the purposes of the
Income Tax Act.
The estimate for historical years is based on data from Revenue Canada. The projected
expenditure estimate is based on the growth in nominal GDP obtained from the CEFM.
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CHAPTER 6
Sales of personal-use real property
The sale of personal-use real property by an individual or trust (all of the beneficiaries of which
are individuals) is exempt under the GST. Examples include the sale of used owner-occupied
homes and country properties kept for personal use. However, the exemption does not include
real property that is sold in the course of business.
No data are available.
122
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